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Norway’s national obsession with the weakness of its currency seems to be spreading, which is a good enough excuse for FT Alphaville to write more about it. Sorry.
The latest to tackle the “mystery” of Nokkie’s weakness is Apollo’s chief economist Torsten Sløk, who has a refreshingly straightforward take on the subject:
The depreciation of the Norwegian krone has been driven by the Fed raising interest rates faster than Norges Bank and by weak oil prices.
Which is a lot more succinct and conspiracy-free than some of the other theories we’ve seen, even if it has some weaknesses.
For example, the Norwegian krone is also noticeably weak against the euro, despite the ECB raising rates less than Norges Bank, and now cutting them. Moreover, the krone actually kept falling even as oil prices surged in early 2022.
Anyway, you can see all the charts underlying his argument here. As always, they’re worth a look.
Another interesting report — with a different, more historical perspective — landed in our inbox on Friday afternoon. SEB’s economist Johan Javeus notes that the Norwegian krone and Swedish krona (which a lot of people also reckon is mysteriously weak) are now trading at almost exactly the same exchange rate as when they emerged roughly 150 years ago.
It’s tempting to make an efficient markets joke here, but as Javeus points out, it’s intriguing that they are still so closely linked despite very different economies.
Here are Javeus’s observations, which are long on history but include some interesting forward-looking takes at the bottom:
Today, a Swedish krona and a Norwegian krone cost about the same, but what many people don’t know is that this was also the case when the two currencies were created 150 years ago. Despite the fact that a lot has happened since then and the Swedish and Norwegian economies today look quite different, it still almost seems as if there is an invisible rubber band between the two kronas.
At the time of writing, one euro costs 11.40 Swedish kronor and 11.76 Norwegian kroner. Most economists think that both Scandinavian currencies are far too weak. In an analysis this summer, the IMF concluded that Sweden has the most undervalued currency of all the 30 countries included in the study (Norway was not included)*. But now it is not economists at the IMF or elsewhere who decide what the currencies should cost, but the market. Why NOK and SEK are so weak, no one really knows. For the Swedish krona, there are many hypotheses that include everything from previous negative interest rates, our pension system with a lot of savings in foreign equities to risks in our real estate sector and several other things. But no explanation in itself is completely convincing. The fact that the Norwegian krone is so weak is also puzzling, and the explanations there range from oil prices to the fact that it is a small currency with few financial assets for foreign investors to buy. The fact that both currencies are relatively small could be an explanation, but even that does not feel completely convincing and if you look around the world, there are many currencies that are even smaller and still have developed well. The mystery is not lessened by the fact that the Swedish and Norwegian economies are now quite different, where the Norwegian one over the past 50 years has largely been built around the country’s large oil resources.
150 years of currency history
But despite the fact that there are many differences, there is no getting away from the fact that the Swedish and Norwegian krone have a long common history. The Swedish krona was introduced more than 150 years ago, in 1873, and then replaced its predecessor, the riksdaler. The currency change was made in co-operation with Denmark in what came to be called the Scandinavian Monetary Union. Two years later, in 1875, Norway also joined the co-operation and the new kronas, which all had the same value, could also be used as a means of payment in all three countries. The krona, like most currencies at the time, was linked to the price of gold via a gold standard, where the central banks guaranteed that anyone who wanted to could redeem their currency for a certain amount of gold**. The currency union lasted until 1914 when the First World War led to an increase in the demand for gold so much that almost all central banks had to let go of the gold standard in order not to risk completely depleting their gold reserves. The war, and especially the subsequent crisis years, was a turbulent period for both Sweden and Norway. First with high inflation during the war and then severe deflation and economic crisis. After the war, Sweden was quicker than Norway to reintroduce the gold standard, but by 1928 the Norwegian krone had recovered all the previous losses against the Swedish krone. The Second World War was the next big test and when the war was over and large parts of Europe lay in ruins, Sweden, which had its entire industry undamaged, was forced to revalue the Swedish krona sharply. This was followed by another long period of stability with the dollar and the Bretton Woods system as anchors. This lasted until the early 1970s when the United States, burdened by spending on the Vietnam war, was forced to drop the gold peg and let the dollar fall.
For Sweden, the following decades saw several crises caused by oil price shocks, recurring devaluations to try to maintain competitiveness and a major real estate crash in the early 1990s. For Norway, the 1970s were instead the beginning of a golden age in which the country went from being a poor fishing nation to becoming one of the world’s richest countries with an economy built around the oil sector. The peak for NOK/SEK was reached in the spring of 2009, in the middle of the global financial crisis, which hit both Norway and Sweden hard but still became tougher for the Swedish krona. In the 15 years that have passed since then, neither the Swedish nor the Norwegian krone has performed well in a global perspective, but the Swedish krone has nevertheless performed less badly in a relative sense.
Both interest rates and currencies can move a lot over time, but unlike interest rates, currency movements do not need to be reversed. Instead they can trend over a long period of time and be permanent at completely new levels. 150 years ago, as a Swede, you could buy a dollar for SEK 3.73, far below today’s exchange rate of SEK 10.25. A Swiss franc cost only SEK 0.72 compared to a sky-high 12.04 today. In percentage terms, the dollar has strengthened by 175% and the Swiss franc by an whopping 1570% against the krona. But relative to the Norwegian krone, we have not had a trend and today the exchange rate is only a measly 3% from where it was at the start 150 years ago. Unlike then, it is also the market that today thinks that this is where the price should be.
Hand in hand towards the future
In Sweden, the weakness of the krona in recent years has led to increased demands and speculation that we should finally join the euro as most of the other EU member states. In fact, even in Norway recently, proposals have been put forward to unilaterally peg the Norwegian krone to the euro, despite the fact that Norway is not an EU country. An even more radical idea would be for Sweden and Norway to drop all thoughts of the euro and invest in a new common Swedish-Norwegian currency union again, since it still seems as if there is an invisible rubber band between our currencies. The latter is of course not realistic for many reasons, but the fact that our currencies still seem to move in tandem strongly suggests that they will continue to develop in a similar way in the future. Against this background, a Swedish euro membership that stabilised our currency against the rest of the world would probably be the best thing that could happen to the Norwegian krone as well.
Wild speculation is encouraged around here, but euro membership for Sweden — let alone euro-pegging in Norway — seems like a pretty big leap. At least for the foreseeable future.
Perhaps there should simply be more focus on the upsides of weaker currencies? As much as it complicates the inflation outlook, both Norway and Sweden are high-wage, export-dependent countries that benefit from having feeble currencies.
If they do recover their mojo, both Sweden and Norway might discover that the only thing worse than a weak currency is having a strong one.