Norwegian Krone Gets Slammed

The Norwegian krone is the hardest hit of the major currencies today, losing 1.5% against the dollar and 1.2% against the sagging euro. The krone has fallen now for the third consecutive session. The ostensible trigger for today's drop was the unexpectedly soft inflation report that showed core inflation back to the central bank's target for the first time in a year. After the unexpected strong rise in the June CPI and signs of the resilience of the domestic economy, many had leaned toward a Norges Bank rate hike later this year or early next year. The softness of the July inflation figures--the 0.6% decline on the headline rate and the core rate was three-times greater than the market expected--and has been enough to ease expectations for this week's policy meeting. Some participants had looked for the central bank to adopt more hawkish wording to prepare the market for a hike, but this has been dashed now.

Moreover, the Norwegian krone and the Swedish krona were among the best performers among the G10 over the past months. Their appreciation was partly a function of the global economic recovery story gaining traction. They were among the hardest hit during the most acute part of the crisis and have been among the leading beneficiaries of the recovery story. One of the forces we have identified recently is that the recovery story to some extent has been taken on board by the market and leaves some of the major currencies vulnerable to profit-taking.

Since the middle of July, the euro has lost about 5.5% against Nokkie. The move above Friday's high near NOK8.76 has triggered stops and the next objective comes in near NOK8.83-NOK8.84. The move seems a exaggerated today, but there is no compelling sign to indicate a euro high is in place.