Commodity currencies — Canadian dollar, Australian dollar, New Zealand dollar, Norwegian krona, Brazilian real and Mexican peso — tend to rally during periods of improved risk appetite associated with rising equity markets and decline during eroding market confidence and stock market declines. But which currency has shown robust gains during risk appetite and relatively modest declines in time of market panic? The answer is the Norwegian krona, or the Nokkie.
Before discussing the Nokkie’s performance, let’s look at Norway’s underlying fundamentals. The nation’s oil and gas sector makes up about 25% of the overall economy, and more than 50% of total exports. Strong energy earnings have given Norway the fifth largest current account position in international trade, behind China, Japan, Germany and Russia. Current account balance strength is always a plus in currency economics, allowing a currency to better absorb losses during global risk aversion and rebound faster during recoveries.
Norwegian consumer debt is escalating courtesy of a run-away housing market with personal debt estimated to exceed 200% of disposable income next year, the highest since 1988. The burden is not based on the same unsustainable metrics as in the United States, but is the result of all-round economic strength; house prices up 8% annually, household credit up 7.1% annually and a 2.7% unemployment rate, lowest in Europe.
The potential repercussions of Norway’s strong trade links with the Eurozone (37% of total trade) could weigh on the currency in the event of a full-fledged recession on the Continent, but Norway’s trade activity is linked primarily to core Eurozone nations in the North, rather than their struggling southern European counterparts (Greece, Italy, Ireland, Portugal and Spain).
Unlike most nations in the G10 world whose finances have been strained by stimulus packages and eroding finances, Norway is equipped with the world’s second largest sovereign wealth fund. Valued at $566 billion, the fund is capable of shielding consumers, businesses and banks alike.
During the post-crisis recovery in equity indexes and energy prices, Brent crude oil rose 108% from the trough of March 2009 to the peak of April of this year. During the same period, the Nokkie climbed 33% against the U.S. dollar, just behind the Brazilian real and Canadian dollar, which rose 52% and 36% against the greenback, respectively.
How did the Nokkie fare during falling oil prices and risk aversion? "The preferred commodity currency" shows NOK is the only energy-related currency to have increased against the U.S. dollar this year. As of Oct. 12, 2011, Brent crude oil dropped 10% while NOK increased 3% against the U.S. dollar. In contrast, all other tradable liquid currencies dependent on gas and oil are down over the same period. The Canadian dollar, -2%, and Mexican peso, -7%, each dropped against the greenback. The Nokkie also outperformed the energy-dependent Russian ruble, -1.8%, and Brazilian real, -7%, against the dollar in 2011.
Norway’s economic and financial vitality also can be seen in its monetary policies. The Norges Bank, the nation’s central bank, was among the first in developed nations to raise interest rates, October 2009, in the aftermath of the financial crises. The Reserve Bank of Australia was the only G10 central bank to raise its rates that month, drawing its strength from China’s hefty demand for resources. But Norway has no single economy on which to rely. Instead, healthy consumer balance sheets, disciplined monetary policy, vast energy resources and a diverse export base have proven vital shock absorbers.
One negative for the NOK could be size. According to the latest Bank of International Settlements survey, the NOK accounted for 0.65% of all global FX transactions. Such low liquidity could make exits difficult, especially in crosses.
This analysis shows the Norwegian krona’s outperformance relative to sister currencies during increases as well as declines in risk appetite. This makes the Nokkie an attractive option in a risk-on/risk-off trade, or to further hedge an energy-related currency trade. Over the last three years, investors have learned the hard way by aggressively chasing advancing currencies, only to sustain severe losses during the next bout of risk aversion. Currencies such as the Australian dollar, New Zealand dollar and Brazilian real have preceded their peers to the top but were quick to shed as much as a third of those gains within two months. That is not the case with the Nokkie. Just as commodities’ exposure has become essential to any investment portfolio, the inclusion of the Norwegian krona is a growing practice among banking and corporate Treasuries. Retail investors also can consider this robust currency for the long-term.
Ashraf Laidi is an independent strategist and author of "Currency Trading & Intermarket Analysis." His Intermarket Insight appears daily on AshrafLaidi.com.