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We often see the Brent oil price as a factor for explanation of the moves in the Norwegian krone NOK versus other currencies, but how does it really work over time? We have been looking closer to this relationship and have some interesting findings. These findings can be split in three levels:. In figure 1 we can see the correlation and the Brent oil price in USD.
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We often see the Brent oil price as a factor for explanation of the moves in the Norwegian krone NOK versus other currencies, but how does it really work over time? We have been looking closer to this relationship and have some interesting findings.
These findings can be split in three levels:. In figure 1 we can see the correlation and the Brent oil price in USD. As can be seen in figure 2, the correlation is rocketing when there is a big drop in the oil price.
But how is it when the Brent Oil price goes up a lot? As can be seen in the figure 3 the correlation drops and at times significantly when the Brent oil price increases strongly. As seen in figure 4, the correlation was falling albeit with high volatility in the golden oil days where we had the Brent oil price over USD for a period of around 3 years.
In this period the correlation was in average around 0. This differs a lot to the more recent period with oil prices below 60 USD, where the correlation was steady around 0. Are the currency traders forgetting the NOK in the good times with steady high or increasing Brent oil prices? Here above we have used the quick and dirty explanation we often meet when discussing with international investors. At least it is more relevant than the Brent oil price in USD.
With other words nothing to do with the oil price and noise in the above study. Compared to figure 1, we notice that the correlation when using the Brent oil price in NOK and looking at simple linear trend lines is roughly 0. What does this mean?
As figure 6 shows, the correlation falls a little further when looking simple linear trend lines for the correlation between Trade Weighted NOK and Brent oil price in NOK. It is noticeably how the correlation differs in the above described period from the financial crisis up until the start of the oil price crisis in Thereafter the difference in correlation is much less visible. How should we understand this? Except the above mentioned, there was no substantial difference and this can be explained by the fact that Norway trades a lot with Europe, hence the EUR has an important weight in the Trade Weighted NOK.
There is a correlation, but it is very volatile, hence referring to a single number does not make sense. There seems to be a pattern where correlation increases when the market can smell trouble for the Norwegian oil related industry and the Norwegian state.
Adjusting to data series that are more relevant for the Norwegian economy at large and that way get closer to a fundamental description of the link shows that the correlation decreases. Do international investors fully understand the mechanisms at work when they play a weakening NOK due to a fall or expectations of a fall in the oil price? It does seem that this is not the case as there is no mirroring when the oil price is strong.
I have worked for 25 years in international markets and I have seen this many times, investors cannot focus successfully on all things at all times, and therefore many of them play the NOK only when it looks bad and they tend to use the Brent oil price as an indicator of where the NOK is going. Does this create an opportunity with the current historically weak NOK? Due to the fundamentals and the outlook of Norway compared to the rest of Europe, I think so. Potential global trade war — Nordic exports and currencies.
Weakening of Nordic currencies due to differing growth prospects? Why is the Norwegian Krone so weak despite the stronger oil price? We have seen the Norwegian krone NOK weaken substantially to other currencies in the Corona crisis despite being already at a historical level, including the euro EUR that we will discuss in this article.
Of noticeable particularities in the country, is the domestic green hydropower covering all the domestic electricity consumption. They also have the highest proportion of electric cars in the world. Moreover, at the same time, Norway produce oil and gas, albeit in the cleanest way and reserving the money earned to the Norwegian people. Nordic Fixed Income Update - Is the bond market crisis over? I have discussed with our Nordic portfolio managers. Q — What is on the top of your mind now after the liquidity crisis we have seen in the Fixed Income credit markets?
We are asking ourselves many questions now:. Investments in funds are always related to risk. Past performance is no guarantee of future results. Performances are calculated net of fees. Investments in funds are subject to market fluctuation and risks inherent in investing in securities.
The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment. On the same subject:. Norway — a sustainable oil and gas producer, does that really exist and what is the future?
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