Norwegian Krone (NOK) forecast

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Topic Author
deepvalleys
Posts: 41
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: 41
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
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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
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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
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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
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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.
Topic Author
deepvalleys
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Location: Norway

Re: Norwegian Krone (NOK) forecast

Post by deepvalleys »

Valuethinker wrote: Mon Sep 13, 2021 12:10 pm 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.
So far this analysis seems to be correct. With the ongoing oil and gas shortage, the NOK has strengthened (against Euro). Unfortunately my funds are at the moment not currency hedged. But a stronger NOK is good for me as a consumer.
Valuethinker
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Re: Norwegian Krone (NOK) forecast

Post by Valuethinker »

deepvalleys wrote: Mon Oct 11, 2021 1:47 pm
Valuethinker wrote: Mon Sep 13, 2021 12:10 pm 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.
So far this analysis seems to be correct. With the ongoing oil and gas shortage, the NOK has strengthened (against Euro). Unfortunately my funds are at the moment not currency hedged. But a stronger NOK is good for me as a consumer.
This European gas crisis was certainly not anticipated (by me, at least).

Oil and gas are always highly cyclical. What's different this time is there are increased restrictions on investment in new carbon-producing assets. That's a global thing-- although probably pretty minor up to now. Money will be found to invest in the industry, of course, but it will come with a higher price. There is a risk that new production will not fulfill all the demand -- so prices will rise long term.

We have gasoline/ petrol shortages in the UK (due to a particularly nasty combination of Brexit + not enough Heavy Goods Vehicle licensed drivers to take the petrol from the depot to the service stations). For a couple of weeks, the local food bank (food parcels to the poor) was begging for anyone with an Electric Vehicle to come and help with deliveries. I think they got quite a few Tesla owners! £80k car delivering food supplies to the poor. This sort of thing does nothing but enhance the attractions of EVs (queries online rose several thousand per cent).

I don't see the Russians giving up on oil and gas any time soon. Hopefully gas prices will have come down by the spring & this is a short term disruption.

It must make the Europeans be very afraid of depending upon a single big gas supplier like Russia for heating, industry and increasingly electricity generation. However there's not much they can do about it in the short term.

I still don't think anyone can call currencies. You could argue that since a rising NOK means your purchasing power is improved, you want to be 100% hedged into the other currencies in your investment portfolio-- you only really care about NOK falling. I am not that extreme, but it's perfectly reasonable not to hedge your global equity exposure.
Topic Author
deepvalleys
Posts: 41
Joined: Sat Dec 06, 2014 7:38 am
Location: Norway

Re: Norwegian Krone (NOK) forecast

Post by deepvalleys »

In principle I want to be in unhedged global funds. However at the moment it looks like the NOK could potentially strengthen a lot, but like you say it's impossible to predict.

So do you hedge your portfolio against GBP?

Other non-US people reading this thread - do you currency hedge your portfolio?
Valuethinker
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Re: Norwegian Krone (NOK) forecast

Post by Valuethinker »

deepvalleys wrote: Tue Oct 12, 2021 8:56 am In principle I want to be in unhedged global funds. However at the moment it looks like the NOK could potentially strengthen a lot, but like you say it's impossible to predict.

So do you hedge your portfolio against GBP?

Other non-US people reading this thread - do you currency hedge your portfolio?
For taxation reasons I hold a lot more bonds that I would otherwise. Say about 50%.

I've never identified a bond fund in the UK that does not hedge into GBP. That's partly where my pensions are held.

So yes, I am 50% hedged into GBP. Also my home equity and my salary (& a small Final Salary/ Defined Benefit pension) are all in GBP. Hopefully those are hedged to inflation pretty much (the pension definitely is, the salary increases lag inflation, home equity probably exceeds inflation in the long run (and certainly has in the last 25 years)).

The GBP took a one off drop in global purchasing power with the Brexit vote in 2016 and the EU Withdrawal Agreement in 2019. Say 10% (but might be 20%). Nothing much I can do about that, it just happened. Very reminiscent of various devaluations in the postwar years when we had fixed exchange rates & limits on how much we could take overseas (£100 per holiday-- trips overseas were quite rare before the 1980s). Hopefully we don't depreciate further from here. My GBP hedge (which was done for entirely different reasons) has hurt a lot. Also the UK stock market has underperformed pretty much any other major stock market, for structural reasons-- "technology" is only 2% of the market v say 40% in USA; big sectors are oil & gas, mining, tobacco, pharma etc. Some of the funds I hold are overweight UK.

If the GBP were to appreciate from here I would enjoy cheaper holidays and a relief on pricing pressure & shortages that we are currently experiencing (hopefully, although these are largely supply chain & Brexit related plus the gas situation we have discussed).

If it falls from here then my portfolio is something of a hedge.
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