Double Trouble in the Fjords – Perhaps It’s Time to Short the Norwegian Krone

Introduction

Traditionally, July is a slow month in Norway. Receiving sizable vacation pay in June, most Norwegian take three to four weeks off in July, enjoying most of their five-week annual leave. If you worked overtime, you could add a few extra weeks, taking back those extra hours worked, turning that holiday into a sabbatical. However, while Norwegians live it up in Spain, Thailand, Croatia, and even America, trouble awaits them when they return home this fall.

While housing prices may have finally reached the long-anticipated tipping point and the monthly trade balance posted a deficit for the first time since December 1998, the Norwegian Krone gained substantial strength, closing at 8.07 against the US Dollar. Going against the wishes and needs of exporters, that is well below the USDNOK=8.45 YTD average (July 18, 2017).

However, Norges Bank indicated that rate cuts are over, following the ECB’s and US Federal Reserve Bank’s lead. Considering the importance of housing in the Norwegian economy and the need to boost exports, compensating for a fading oil sector, we can expect new and more exotic policies to push the NOK back down are already on the way.

Building the Case Against the NOK

Housing and Trade, which benefit from low-interest rates fueling leverage while driving down the NOK are showing fatigue despite favors from the Central Bank:

Housing

Even with historically low-key rates (.5% since early 2016) and a surge in money supply back in early 2015, housing is finally peaking. That is not only a result of Norges Bank’s change in bias, but also many Norwegian banks started to increase lending requirements for investment property.

Interest Rates vs. Oslo Housing – The housing party in Oslo was clearly fueled by excessively low-interest rates (well below the rate of inflation).
Sources: Norwegian State Statistics Bureau (SSB.no) and Norges Bank:

Unbeknownst to most Norwegian, Norges Bank boosted money supply to buy the Kroner needed, from the sale of NBIM’s assets that are denominated in foreign currency, covering the rising government expenses. The public spending resulting from the boost in money supply, buying apartments for refugee housing, further boosted Oslo housing prices.
Sources: SSB.no and Norges Bank

Even the Norwegian mainstream media is starting to acknowledge that the party is coming to and. The always up Oslo housing is running out of Viagra and cocaine. Not only are viewings down, but real estate agents are advising clients to cut prices and lower their expectations. The first reports of homes in Oslo selling below asking price are coming out as well. That is a huge departure from just last year where the attitude towards housing was optimistic despite the warnings about being overleveraged.

Trade

Norway’s trade surplus, mostly depending on oil, has taken a hit despite all the measures to boost exports. Although Norway compromised philosophical values and its IT and engineering sector, hoping to boost fish sales, the trend line has been defined.

Observing the Trade Balance on a monthly basis, we can better see recent developments. Considering the recent surge in the exchange, coupled with oil’s decline, Norway must boost exports. Source: SSB.no

Extrapolating current trends to 2017 year-end and assuming an average exchange rate of 8.45, the Trade Balance still could tick up by year’s end. Source: SSB.no

The Norwegians need to think beyond a natural resource economy, finding a way to bring back shipbuilding and steel – the industries that made the Vikings famous.

Summation

With rate cuts off the table and now too obvious. It appears we can expect a somewhat expected surprise next month when the money supply is updated. The chart below clearly illustrates the losing battle between money supply and exchange rates. In the end, the Central Bank always yields, adding money supply to appease those who want a weak Krone. As of the latest report, Money supply is up 7.2% year over year.

The next money supply report comes out on August 8, 2017,
Source: SSB.no and Norges Bank.

At 8.07 today, the NOK is on the stronger side of the trend, ready to take a hit, shoring up trade and housing.

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