Why is the Norwegian krone so weak?

The chart above shows the EURNOK exchange for the last 10 years (if it goes up, it means the euro is stronger). As you can see, lately the EURNOK has overpassed the former resistance, 10, which means the krone is getting weak. Many readers ask us why and we clearly understand their question, basically because somehow the Norwegian economy is strong and the oil price is not so low as people were forecasting.

Some analysts have tried to explain this paradox in terms of inflation. As the inflation in Norway was higher than in Europe, if we wanted to buy the same basket of products year after year, the currency with the higher inflation should weaken (PPP theory). In fact, we think it is part of the reason, but not totally. Inflation in Norway is surprisingly being lower than expected during this year, even with a bigger fall than the Euro Area.

In terms of interest rates, the Norges Bank has marginally been increasing them to a extremely low 1.5%, higher than the ones in the Euro Area though. If we add the soundness of the Norwegian finances, we think the EURNOK is too high. Probably, the exchange is controlled by Central Banks to avoid making the NOK the new Swiss franc. In any case, at today’s prices, it could be interesting to bet on the NOK strengthening.