The Norwegian Kroner as a safe haven?

Post the Swiss National Bank pegging the CHF to the EUR, with a minimum exchange rate of CHF1.20, forex traders have been scurrying to find a new safe haven, and some have been turning to the Norwegian Kroner (NOK).

Norway has a strong fiscal position with a positive account surplus, a fiscal surplus and a relatively high interest rate. The Norwegian economy also benefits from relatively strong domestic demand in oil and gas investments.

However, there are a number of reasons raising scepticism about the NOK’s suitability as an alternative safe haven, including its correlation with the oil price, liquidity, and the possibility of central bank intervention.

Ideally, a safe haven asset should be one that is relatively isolated from global economic and political turmoil. The NOK is not such an asset.

Oil and related industries represent about 70% of Norway’s total exports. This means that while Norway benefits from the inflow of oil dollars into its economy, it can also be considered a commodity currency like the AUD, CAD and NZD. Commodity currencies are rarely seen as safe havens, as concerns about potential slowdowns and reduced demand for commodities, alongside the USD strengthening as a true safe haven and pushing commodity prices down, cause these currencies to fall.

The NOK is positively correlated with oil, which, although it has risen since the beginning of October, is still far below its early August levels, where prices were approaching USD120 a barrel. The NOK reflected this pattern, though the large fall against the USD didn’t occur until September, the USD/NOK hit a high in early October before falling again. The EUR/NOK was more volatile in August and September, but has also been falling throughout October.

Next, there is a liquidity issue. A safe haven should be available to be bought and sold as and when it is needed. Over 86% of forex trades involve the USD, making it very liquid. In contrast, the NOK accounts for less than 1% of global forex turnover.

Finally, there is the possibility that Norges Bank, Norway’s central bank, may intervene in the currency in a similar manner to the Swiss National Bank intervening in the CHF. Norges Bank has a reputation as a tough central bank that would be unlikely to tolerate a sustained influx of speculative capital into its currency and economy.  And, in the week that the Swiss National Bank pegged the CHF to the EUR, Norges Bank governor Øystein Olsen warned that Norway would be willing to intervene if the NOK became too strong.

That being said, the NOK is still attractive for other reasons, including Norway’s financial strength and the fact that with an interest rate at 2.25% it offers a positive carry.

Additionally, in the event that one of the periphery economies leaves the eurozone, the NOK could prove to be a good hedge. Studies presented in Norges Bank’s Financial Stability Report have shown that because of Norway’s lack of financial and banking exposure to the peripheral eurozone countries, Norwegian banks should withstand renewed turbulence in the financial markets. They are also sturdy enough to bear potential loan losses resulting from an appreciating NOK, should there be an influx of safe-haven-seeking funds.

Also, if global growth were to slow over the next two years, with a budget surplus of 9% of GDP in 2010, Norway has a substantial buffer even if oil prices were to fall.

USD/NOK and EUR/NOK trading dynamics are driven by a number of factors and, despite chatter that the NOK could be an alternative safe haven, its September fall, correlated with a falling oil price shows otherwise. However, there are other reasons to invest in the currency.

In the near-term, the NOK is likely to continue behaving as a commodity currency – rising with risk appetite, and falling as risk aversion climbs. In the medium-term, the NOK is likely to continue strengthening against the euro, with the EUR/NOK approaching the 7.50 level (almost reached in September) in 2012.

Related articles

• Safe haven currencies (talkingforex.wordpress.com)