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Norwegian Krone Suffers as Crude Oil Drops

February 8, 2011 - Written by John Cameron

The Norwegian Krone has suffered a poor seven days on the currency markets as it continues to give up some of the gains it has made over the last two months. At the end of last November, the Krone was trading at above 6.2000 against the US Dollar on the wholesale markets. It briefly broke down through 5.7000 last week on the same market, but recovered to trade at 5.8000 yesterday.

These near term losses have been primarily caused by a downward movement in the price of Crude Oil, (Norway is the seventh largest oil exporter in the world). The price of a barrel of crude was down by 1.5% at one point during today’s European session. This downward move was in turn driven by an unexpected interest hike in China. Earlier today, The People’s Bank of China announced on its website that they will increase its headline one year interest rate from 5.81% to 6.06%, with effect from tomorrow. China’s one-year deposit rate is set to increase to 3 percent from 2.75 percent.

Earlier today, Norwegian Finance Minister Sigbjoern Johnsen used an interview in Oslo to warn the markets that a key plank of Norwegian economic policy was to ensure that the appreciation of the Krone would not hurt Norwegian exporters. The Krone has gained nearly 5% against the Euro since the start of November, seriously affecting Norway’s terms of trade with its closest trading partner, the Eurozone. Johnsen went on to suggest that Norwegian government spending levels would be limited so that an increase in central bank interest rates from their current level of 2% would not be necessary. These comments are likely to weigh down the Krone, with market-makers downwardly revising expectations for Norwegian interest rates for the remainder of 2011.

Given the Krone’s strong performance in the Foreign Currency markets since last Autumn, it is possible that Sigbjoern Johnsen’s comments may herald a bout of sideways trading for the Krone, at least until oil starts to rally again. Any readers needing to send Krone back to the UK in the near term should consider exiting the market now.

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