Norway buffs armor as currency wars open new front
September 8, 2011, 1:26 PM.Central bank alarms are ringing in Scandinavia now that currency traders must roam further north to find a safe-haven alternative to the Swiss franc USDCHF.
Norway’s krone rose 2% against the euro Tuesday, its biggest jump since Jan. 2009, after the Swiss National Bank said it would prevent its currency from rallying over a certain level against the euro — sending some investors seeking a safe-haven in the krone and Swedish krona. The Norwegian krone USDNOK has gained about 1% against the U.S. dollar since the SNB move. Read more on Swiss move.
But the Norwegian central bank appears ready to step in to make the krone less attractive.
On Thursday, Norges Bank Governor Oystein Olsen directly addressed the krone’s jump after the SNB move, and warned:
A krone that is too strong can over time result in inflation that is too low and growth that is too weak. In that case, monetary policy measures will be taken. In Norway, the key policy rate is the relevant instrument.
After the speech, Citi currency analyst Greg Anderson said that “the pertinent issue for FX markets is the amount of appreciation that Norwegian authorities will tolerate before beginning to interfere as the Swiss ultimately chose to do.” Citigroup economists think there’s now a strong possibility of a Norwegian rate cut at the central bank’s Sept. 21 policy meeting if the krone keeps rising.
But the Norwegian central bank, which in 2009 became the first major European institution to hike interest rates since the credit crunch, has a little more wiggle room than its Swiss counterparts did. In Norway, benchmark interest rates are at 2.25%. In Switzerland, where central bank authorities failed to stave off the Swiss franc’s rise with more conventional currency interventions before Tuesday’s vow to buy unlimited quantities of euros, rates are near 0%. But Norway may not be able to hold out for long.
“Like the SNB, the Norges Bank may eventually arrive at a point where intervention is necessary,” wrote Anderson in emailed comments. “In fact, given the Swiss experience and the way markets learn, the evolution to that point may be relatively rapid.”