Late 2019 Recovery for NOK
Movements in the NOK exchange rate benefitted Norwegian exporters once again over most of 2019. At its lowest, the Norwegian Kroner was weaker by around 7.3% against the US Dollar. However, the deprecation in NOK began to reverse over Q4 before settling the year just over 1.5% weaker. As with the US Dollar, NOK was lower by around 4% against EUR, though ended the year on roughly even terms.
Norges Bank & Oil In Focus
The recovery in NOK was largely a function of the increased perception that the Norges Bank will soon move back into tightening its monetary policy along with the recovery in oil prices, which benefited from improvements in the US/China trade negotiations.
Norges Bank Rate Hike Expected
After four rate hikes over the previous twelve months (last one in September 2019), at its December meeting, the Norges Bank opted to maintain its headline policy rate at 1.5%. The interest rate path projections for 2020 continue to forecast a 40% implied probability of a hike, though the timing has moved into Q2 from Q1 previously. The interest rate path for 2021 was revised slightly higher also, in line with the bank’s growth and Inflation forecasts which were either maintained or revised higher.
Norges Bank Head Advises Caution
The bank’s statement and updated forecast were deemed hawkish by the market, anticipating an increased likelihood of a rate hike in H1 2020. However, the head of the Norges Bank, Oystein Olsen, was keen to downplay hawkish expectations. In an interview following the bank’s meeting, Olsen told reporters “We haven’t raised the rate path,”, adding that it would be incorrect for markets to judge the meeting to have been hawkish, adding that the new rate path projections and the prior are “not only very close,” but are “more or less the same,”. Olsen says that the policy rate is most likely to stay on hold over the forecast timeframe.
Volatility in Crude Prices
If oil prices continue to appreciate this, this could see hawkish expectations building even further, given that income from oil exports accounts for around 20% of Norwegian GDP. Following news that the US and China have agreed with a phase one trade deal, crude prices have been higher by over $10. The deal, which is to be signed on January 15th, comes amidst a backdrop of increased OPEC+ production cuts and, in recent days, a fresh outbreak of tensions between the US and Iran which is had been also putting upward pressure on crude prices. However, with US/Iran risks having subsided in the short term, Crude prices are now reversing lower suggesting the risk of a deeper move lower in the coming weeks.
Difficulties With Anticipating FX Movements
The reversal in NOK over late 2019 as well as the general path of NOK over the last year and a half, highlight some of the difficulties with attempting to anticipate currency movements. Despite four rate hikes, running from 2018 into 2019, NOK was broadly lower against both USD and EUR. Looking ahead now, there is a disconnect between the market’s hawkish interpretation of the latest Norges. Bank meeting and the perspective of the central bank’s head. Is the market correct to anticipate a forthcoming rate hike and the Norges Bank is simply playing it down? Or is the market offside and the Norges Bank will remain on hold across the year? These are some of the issues currently troubling NOK traders.
Why Should Businesses Hedge FX Risks?
For corporates, the game of FX speculation is a risky one and engaging the FX market is best restricted to the hedging of currency risks. FX forwards provide a stable and reliable way of helping businesses offset exchange rate risks. For example, let’s say a Norwegian exporter receives payment in EUR. To offset the risks of any adverse strengthening in NOK between the time of agreeing on the transaction and the payment date, the exporter can sell EURNOK forwards, locking in transaction value for the agreed amount at a future date. This will help offset the negative impact of any rise in EURNOK while still allowing the business to benefit from any fall in the exchange rate.
Similarly, let’s say a Norwegian importer purchases goods in USD. Again, to help offset any fall in the value of NOK the importer can sell-buy USDNOK which will help offset the negative impact of a fall in the value of NOK. Hedging FX risks is a vital tool for global companies which can often see various parts of their cash flow exposed to currency exchange rate risks. As opposed to speculating on the direction of FX markets, hedging offers businesses protection against everchanging FX rates.