Norway’s central bank says it is weighing a very rare intervention in currency markets to prop up the krone, after the currency plunged from what was already a record low against the dollar.
Norges Bank said on Thursday morning that due to the “historically large” currency swings it was “continuously considering whether there is a need to intervene in the market by purchasing Norwegian kroner”. It described the situation as “extraordinary.”
The warning came after the currency fell from NKr10.50 per US dollar on Wednesday morning to NKr12.02 a day later, bringing total falls since March 9 to about 30 per cent. The krone regained some ground after the announcement, strengthening to NKr11.45 against the dollar.
The falls reflect a crisis for Norway on two fronts: the coronavirus outbreak and a plunge in oil prices. The unemployment rate more than doubled in the week to Tuesday and is set to rise further next week, according to labour statistics.
Analysts were sceptical about the prospect of Norges Bank stepping into the market for the first time in decades to stop the krone weakening further. They said it had previously only made verbal interventions when the currency had strengthened too rapidly, viewing weakness in previous crises as a welcome boost to competitiveness.
“We haven’t seen the central bank step up to defend the krone,” said Erica Blomgren Dalsto, chief Norway strategist at lender SEB. “It’s very rare that central banks that intervene to support their own currencies are successful. Their reserves are usually too small.”
She added that the central bank was more likely speaking out in an attempt “to bring confidence back into the market. I’m not sure if they would actually intervene. Then again, nothing is normal.”
Labour market statistics showed that on Monday 27,000 Norwegians applied for unemployment benefit, 64,000 on Tuesday, and 41,000 on Wednesday — a sharp increase on a pre-crisis average of about 700 a day.
This week the krone also fell to a record low against the euro, dropping from NKr11.57 to NKr13 in under 24 hours to Thursday morning, and fell to a 20-year low against the pound of NKr13.85. After the central bank’s statement, the currency strengthened to NKr12.31 against the euro.
Ms Dalsto said: “It’s a combination of collapse in oil price and risk sentiment. That has triggered some forced selling of Norwegian kroner due to equity portfolios. The moves have been amplified because liquidity is extremely thin. Everybody is trying to sell less liquid stuff to get their hands on dollars.”
She added that there were few natural buyers of krone with Norway’s trade deficit rising, and cautioned that further selling was possible. “It’s a bit scary when you see such hefty moves,” she added.
However, the slide in the krone means that Norway’s oil fund, the world’s largest sovereign wealth fund, has gained on its foreign-currency positions, meaning more money is available for the government to use in its budget under its spending rule. The fund’s assets in dollars have fallen from a recent peak of $1.2tn to $880m on Thursday morning but are close to their record level in krone at NKr10.5tn, up from NKr9.3tn on Tuesday.