The repercussions were predictable rather than unexpected. The S&P 500 fell by 4.1%, while the US dollar strengthened against other currencies – not least the Norwegian and Swedish kroner. Following a similar pattern in the previous months, the dollar is now up by 9% this year against both Scandinavian currencies. An appreciation of this magnitude in four months may not be beyond expectations, but it is certainly infrequent.
A couple of months ago, I wrote that interest rate differentials went a long way towards explaining the development of these currencies against the dollar. I could have added that during the past three years, there was a correlation of a full 0.88 between the USDNOK rate and the spread in 2-year yields. It seemed investors demanded a risk premium to put their money in a small currency like the Norwegian krone (and please feel free to list further reasons, like political risk). As the premium went from positive to negative, the dollar value of Norwegian kroner kept slipping. In April, this negative spread increased from 36 to 63 basis points.
I have used this as an argument that Norges Bank will not want to cut rates before the Federal Reserve does, since a weaker krone makes it harder to rein in inflation. That, of course, is the traditional angle: What’s the implication for interest rates? And if that’s your primary concern, April’s market development was bad news.
It is here that I may have committed an error of omission. After all, it’s actually good news for a lot of investors. Let’s lift our gaze a bit. In just eleven years, the effective NOK rate (against a basket of other currencies) is down 30%. The real effective exchange rate is down almost as much, at 29%, meaning that the weakening krone does not reflect higher inflation in Norway than elsewhere. In short, Norwegian goods and services have grown to become a lot cheaper for foreign customers.
Conversely, Norwegian exporters have seen their NOK prices shoot up. The best example may be crude oil, where the Brent Blend almost reached NOK 1,000 in April – a level never seen before the Russian invasion of Ukraine in 2022 – but the same of course applies to other exporters or import-competing businesses, many of which have most of their costs denominated in local currency. We have a lot of highly profitable companies in our Norwegian and Nordic portfolios that certainly don’t bemoan the weak NOK. With higher margins, many of them may also have higher earnings when measured in dollars or euros. At the very least, they will have become more competitive. That’s a lasting advantage far beyond the current earnings effect.
And for those of our domestic clients who have invested in global portfolios, there’s a double advantage: The foreign exchange market has worked to increase their returns while reducing their volatility. It doesn’t get much better than that.
While I risk painting a too rosy picture trying to make up for my error of omission, these are certainly important facets to consider. So please pause a bit before you bemoan the weak NOK.
Finn Øystein Bergh
Chief Economist & Strategist
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