© Erica Blomgren
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The Norwegian economy is performing relatively well. Unlike a lot of other Nordic countries, Norway is rather unaffected from economic point of view of what is going on in the Eurozone, although developments are very split between sectors. The Norwegian economy is more operating as an oil-dependent economy. The activity in the oil and offshore sector is currently booming and the latest survey on investment plans from the companies operating in the North Sea suggests that investments will continue to run on a very high level throughout next year. This has been giving positive demand impulses to the rest of the economy. Thus, suppliers to the oil sector are performing very strongly and also lifting employment in Norway.
On the other hand, the more traditional manufacturing sector producing mostly intermediate goods that are exported abroad is dragged by a strong currency and by the lack of demand from abroad and especially the euro zone. Overall the Norwegian economy is expected to face close to trend growth next year. It is definitely standing out from most of the other advanced economies from this perspective.
Swiss banks said they will penalize banks holding Swiss Franc deposits. Therefore, investors have sought out other haven currencies where returns are still positive. Their preferred target has been the Norwegian Krona. How these recent developments in Switzerland may affect the Krona's performance in the future?
This is just another factor adding to the appreciation pressure that we have been seeing, especially since last summer, but of course also from a longer perspective. With negative rates such as seen in Switzerland, but also with ongoing uncertainty and problems in the Eurozone, more investors prefer to diversify parts of their portfolios and exposures out from the debt-burden major currencies into smaller peripheral ones backed by strong economic and fiscal fundamentals with, of course, a give-up in liquidity. That has been the main driver for a stronger Norwegian currency so far and we expect it to continue be an important driver going forward. Obviously, with Norway performing very strongly from a growth perspective and also with a solid fiscal position that means that from a fundamental perspective Norway is rather outstanding.
It seems that any further Krone strength will put the Central Bank in a tough position with increasing expectations of a possible rate cut in the medium term. However, policymakers at Norway's central bank signaled the economy needs a higher rates and even the Governor indicated he may raise rates as soon as March. What actions do you personally expect from the Central Bank?
I expect the central bank to put more emphasis on the domestic economy in 2013. Arguably, the inflation rate is low and we will only see a very gradual pickup in inflation due to the previous appreciation of the Krone. Still there is no slack in the economy, the output gap is closed. Furthermore, although inflation from a CPI perspective is benign from an asset price inflation perspective there are potential imbalances building. In particular, house prices are still rising and households debt levels remain high and increasing. Conditional on reduced uncertainties abroad and improving risk appetite Norges Bank will increasingly focus on these domestic issues. Thus, our forecast is that the Norges bank will start hike rates around summer next year. In addition, I do not believe the central bank will consider rate cuts should the Krone appreciate further. Even though we have the input-weighted Krone currently at the strongest level ever, this is not driven by expectations of rate hikes as market is discounting nothing until the end of 2014. Hence, it is fundamental factors that are driving the currency stronger, factors that Norges Bank can not affect through interest rates. However, there is a risk that they will defer the rate hikes instead.
What trend do you expect for USD/NOK and EUR/NOK next year?
I expect further records for the import-weighted NOK, which will result in the Norwegian Krone outperforming against majors. Against the Euro we expect Krone to break previous lows of 7.22 testing around 7.10 by late summer next year. Against the dollar we expect a move down to 6.40 by summer next year. Even though Norway has outstanding fundamentals, the currency is not stretched from a valuation point of view making it relatively attractive compared to also currencies such as JPY and GBP.