The euro is trading at its lowest level
against the Norwegian krone since August 2015. The euro is near its
best levels against the Swedish krona in
nearly as long.
Through the first three-quarters of the year, the US dollar has fallen against most
of the major currencies. There are two exceptions. Sterling’s
story is Brexit. The Swedish krona is the only other major currency that
has fallen against the dollar (~2%). In contrast, the Norwegian krone is
second strongest of the majors, gaining almost 10% against the dollar (trailing
the yen’s 18.7% gain).
The key driver is the divergence of monetary policy. Sweden’s Riksbank has
been and continues to be more aggressive the Norway’s Norges Bank. Sweden
has negative interest rates (minus 50 bp) and a bond buying program.
As recently as this week, Riksbank Governor Ingves has signaled his
intention to ease further. Governor Olsen of the Norges Bank is moving in
the opposite direction. The monetary bias has shifted from easing to a
neutral setting.
Sweden’s challenge is not growth.
The economy expanded 0.5% in Q2 for a 3.4% year-over-year pace. Its
challenge is not inflation. Underlying inflation (not a core measure but
uses fixed mortgage interest rates) stood at 1.4% last month. It finished
last year near 0.9% and was 0.4% at the end of 2014. What the
Riksbank seems most concerned about is that risk that it loses competitiveness
against the euro as the ECB continues to ease. Sweden’s current account
surplus was almost 5% of GDP last year and is expected to be near 5.5% this
year.
Its budget deficit is around 0.5% of GDP this
year, half of last year’s deficit. When the IMF and G20 speak about countries
with fiscal space, Sweden is often not mentioned. This probably due to
the relatively small GDP of around $550 bln.
Noway’s macro performance lags behind Sweden.
The economy was flat in Q2, but excluding the North Sea, the mainland economy expanded
by 0.4%. Headline CPI was 4.0% in August. The underlying rate, which adjusts for tax changes
and excludes energy, rose 3.3%. Norway’s external account is driven by its petrol status. It
stands near 6.5% of GDP. It runs a substantial budget surplus (~5.5% of
GDP), but much reduced in recent years.
The divergence has driven the Nokkie–Stockie
cross significantly higher. It is at its
highest level since mid-2015. At the start of the year the Norway at near
SEK0.95. It is making new highs today above SEK1.07. A weekly
trendline, going back to 2012 comes in above SEK1.0930, though falls toward
SEK1.0870 by the end of the year. The divergence could carry Nokkie through the trendline. We look for
a move toward SEK1.10-SEK1.12.