What is Driving Norway

Norway is widely expected to be the next major country to hike rates. The Norges Bank meetings on Oct 27 and the following day is likely to lift the deposit rate 25 bp to 1.5%. As one of the early hikers, the krone has benefitted. In addition, relatively poorer news from Sweden has seen the krone appreciate almost 9% since Sept 23 against the krona.

Many suspect the krone is also being aided by the rise in oil prices. Look at our correlation matrix, we do not see the oil/krone relationship as being particularly pronounced. Over the past month, the krone-front month oil correlation is only about 30%, though over the past 3 months, the correlation is 51% and over the past 2 years, using daily data, was just below 50%.

Over the past month and three months the krone has a tighter relationship--higher correlation with copper prices at 65% and 51.8% respectively. Even gold has a higher correlation with the krone than oil prices at 65% over the past month.

Most explanations of the krone's strength link it to the rate outlook and/or commodities. There seems to be a third dimension. Over the different time periods, the Norwegian krone is even more correlated with the Australian dollar than it is with copper, oil or gold. Over the past month the krone and Australian dollar are correlated 74.5% of the time and over the past 3 months, the two are correlated 71.6% of the time. Over the past two years the correlation slips to almost 64% of the time. There may be numerous explanations, including that the two are correlated to a third factor, such as interest differentials, but it also is suggestive of crowd behavior or herding.

If one believes the krone will remain a strong currency, consider buying krone against the Swiss franc. The SNB is thought to be among the last of the major central banks to tighten policy. The Swiss franc corrected higher for over the last couple of sessions, but appears to have been rejected above the NK5.54 area and is reversing. The initial target is NOK5.4460, the low from last week, but over the slightly longer term, we see potential toward NOK5.25-NOK5.30
What is Driving Norway What is Driving Norway Reviewed by Marc Chandler on October 19, 2009 Rating: 5
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