Putting A Cap On Norwegian Krone's Prospects. By Nicholas Hastings

The Norwegian krone's catch-up rally is about to be nipped in the bud.

Norway may yet be the first G10 country to come out of recession with the Norges Bank possibly hiking interest rates before the year is over.

But, investors are unlikely to buy into this hawkish story just yet.

With global recovery concerns on the rise and commodity prices, especially crude oil, on the decline, the krone will lose some of its recent attraction.

Since early July, the krone has been benefiting not only from indications that the worst of the global recession is over but from increasing evidence that Norway will be at the forefront of the rebound.

Unlike most other economies, Norway has run both current account and public sector surpluses for some years. The country's enormous Government Pension Fund meant the government was well placed to respond to the economic crash with monetary as well as fiscal easing.

This stimulus appears to have worked a treat with GDP data due on Thursday expected to show that the economy shrank by only 0.1% in the second quarter, a big improvement from the 1.0% contraction of the first quarter.

The Norges Bank has been quick to respond to this improving economic outlook, making hawkish comments suggesting that rates will now have to rise before the end of 2009 rather than waiting until the first quarter of 2010 as the market anticipated.

This all translated into positive news for the krone at a time when optimism over the global recovery was rampant and investor appetite for riskier high-yielding currencies was on the rise.

As a result the euro was driven sharply lower, falling under NOK8.64 at one stage from NOK9.12 only a few weeks ago.

However, the market's mood has changed.

Although the global recovery is still taking place, the process is likely to prove slower than expected and a general adjustment in global risk appetite is taking place, reflected in the sharp fall in Chinese stocks.

For the krone, and the oil-related Norwegian economy, this is not good news.

Lower global demand, especially from China, is undermining commodity prices with crude oil leading the way down.

So although Norway may still be top of the G10 pack when it comes to recovery, the krone may not be able to benefit much more from this prospect just yet.


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Early Monday, a small rebound in risk appetite hlped to lift the krone slightly, with the euro falling to NOK8.6815 by 0645 GMT from NOK8.6922 late on Monday in New York, according to EBS.

The dollar rallied back to Y95.02 from Y94.44 as global equity markets recovered some of the heavy losses sustained earlier this week. The Nikkei gained 0.2% while the Shanghai Composite rose 0.3%.

The euro was up at $1.4129 from $1.4085 and at Y134.29 from Y133.06.