Norwegian Krone (NOK) forecast

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deepvalleys
Posts: 36
Joined: Sat Dec 06, 2014 7:38 am
Location: Norway

Norwegian Krone (NOK) forecast

Post by deepvalleys »

Where is the Norwegian Krone going in the future?

NOK is a very small currency, and has fluctuated a lot. For those of us with salary and maybe savings in NOK the exchange rate to USD and other big currencies is very important. Most economists maintain that the NOK is abnormally weak and will probably strengthen. But will it?

Here are some charts for the last 20 years.

USD to NOK:
Image

Some interesting points on this chart:
- in 2002 the USD cost around 9 NOK
- in the summer of 2008, the NOK had been steadily strengthening and the USD was briefly 5 NOK. I remember that as I was shopping from US internet shops. Alas that didn't last long.
- During the financial crisis the NOK weakened and the USD suddenly cost 7. Which I thought was a lot at the time. The following years the NOK strengthened somewhat.
- During 2014/2015 the NOK weakened tremendously, coinciding with falling oil prices. The NOK seems to have found a new range around 8,50 NOK/USD.
- There's one spike in march 2020 when the NOK fell to 11 NOK/USD (because of the pandemic and the tumbling oil price).

Here is the oil price:
Image
Last edited by deepvalleys on Mon Sep 13, 2021 12:40 pm, edited 3 times in total.
Topic Author
deepvalleys
Posts: 36
Joined: Sat Dec 06, 2014 7:38 am
Location: Norway

Re: Norwegian Krone (NOK) forecast

Post by deepvalleys »

Here's the chart for the euro. It shows a different picture.

roughly:
- the EUR to NOK was more or less flat from 2002 - 2012, except for the financial crisis spike.
- since 2012 the price of the euro has been steadily rising (NOK weakening). Will it continue to rise?

Image
Valuethinker
Posts: 43005
Joined: Fri May 11, 2007 11:07 am

Re: Norwegian Krone (NOK) forecast

Post by Valuethinker »

I don't think anyone can successfully forecast exchange rates.

The forward market gives you a feel for current market expectations, but I don't think the evidence is that this provides a particularly good forecast.

You have to structure your portfolio as a "natural hedge" ie currency of exposure matches currency of likely future consumption. But that's hard to do.

If you know you want a house in Spain, hold Eurozone bank deposits or bonds.

If you know you want to travel in Asia hold money in requisite currencies and or USD.

Given Norway is a small economy whose currency is driven by oil prices, I would aim to as globally diversified a portfolio as possible.
Topic Author
deepvalleys
Posts: 36
Joined: Sat Dec 06, 2014 7:38 am
Location: Norway

Re: Norwegian Krone (NOK) forecast

Post by deepvalleys »

Good answer.

I use global index funds, but the question is of course whether I should currency hedge.

I have realised how risky it is to have ones savings in a small currency like NOK. The interesting thing is, when NOK is weakening, one can get a double payoff by having savings in global funds and a mortgage in NOK. But, should NOK strengthen again one could similarily loose double.

Considering that the world (hopefully) will need less oil in the future, and that norwegian politicians plan a gradual stepping down of oil production, NOK will probably not strengthen much.
Valuethinker
Posts: 43005
Joined: Fri May 11, 2007 11:07 am

Re: Norwegian Krone (NOK) forecast

Post by Valuethinker »

deepvalleys wrote: Mon Sep 13, 2021 11:48 am Good answer.

I use global index funds, but the question is of course whether I should currency hedge.

I have realised how risky it is to have ones savings in a small currency like NOK. The interesting thing is, when NOK is weakening, one can get a double payoff by having savings in global funds and a mortgage in NOK. But, should NOK strengthen again one could similarily loose double.

Considering that the world (hopefully) will need less oil in the future, and that norwegian politicians plan a gradual stepping down of oil production, NOK will probably not strengthen much.
I tend to see it the other way. There will be less investment in new oil and gas production- -world production volume falls by at least 4% pa without new investment. Demand will only fall gradually-- indeed it is still rising. Thus, those with existing reserves could earn windfall profits. After 2030 things may be different as decarbonisation really picks up speed. I think it will be increasingly difficult to make new investments in fossil fuel production after that - banks and investors just won't want to back the companies wanting to do so.

(people still make a lot of money from cigarette production and sales. This despite 60 years of governments in the developed world discouraging smoking, falling consumption (in developed world) etc. It's a huge barrier to entry - no one can come into the market. I suspect oil is going to be that way-- a quite profitable business even if it does not grow much**).

If you own your own home then your home equity is in NOK. If there is a state pension, that is paid in NOK. Those are pretty big exposures. Of course your future spending may be mostly in NOK.

So a fall in NOK shouldn't change your home equity position = value of home less value of mortgage? Mortgage falls in value, but so does the equity in your home.

The main thing is how comfortable are you with swings in purchasing power at home? If you know what currency you will consume in, you can hold that currency. Otherwise, if the NOK falls, many of the things you consume will become more expensive (and vice versa).

Otherwise I would suggest you hold between say 30%-60% of your assets hedged into NOK - either via hedged funds, or by holding NOK bonds and bank accounts. I don't know if there is historical evidence of the "optimal" level of hedging for a NOK resident. If such work had been done, it might be in the recommendation papers as to investment strategy for the Norges bank fund (ie the oil sovereign wealth fund).

With that sort of range, you will never be right. But you will also never be entirely wrong ;-). Joking aside, in investing it's generally felt that to handle profound uncertainty, it's better to be 50% right than to take the risk of being 100% wrong.

Given Norway is a small, global economy, quite dependent on a only a few commodities, I would tend towards wanting less exposure than more to your home currency.

** counterargument. If you are Russia or Saudi Arabia, and you know that world oil and gas consumption is going to fall post 2030, say, the incentive is to produce now and sell as much as you can, now, and turn that into non-petroleum assets. Producers are incentivized to produce *early* because they don't know if they will have a market in 10-20 years time.

So far, OPEC + Russia have proceeded on the basis that they will cut production, to increase or stabilize prices.
Laurizas
Posts: 294
Joined: Mon Dec 31, 2018 4:44 am
Location: Lithuania

Re: Norwegian Krone (NOK) forecast

Post by Laurizas »

deepvalleys wrote: Mon Sep 13, 2021 11:48 am I use global index funds, but the question is of course whether I should currency hedge.
General recommendation is to hedge bonds, not stocks. Also why not be in the middle with 50% stocks hedged and 50% stocks unhedged.
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