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Credit Suisse Leaves Krone With Nowhere to Hide: Nordic Credit

December 06, 2012

Credit Suisse Leaves Krone With Nowhere to Hide

A bundle of five hundred krone Norweigian bank notes and kroner coins are displayed for a photograph at a Forex currency exchange center in Oslo, Norway. Photographer: Kristian Helgesen/Bloomberg

Credit Suisse Group AG (CSGN)’s decision to charge depositors on their Swiss franc accounts has had reverberations further north.

Since Switzerland’s second-biggest bank said on Dec. 3 that it informed financial institutional clients it will start imposing negative interest rates on cash balances held in Swiss francs, investors have sought out other haven currencies where returns are still positive. Their preferred target has been the currency of Norway, which like Switzerland, is outside the European Union.

Norway’s import-weighted krone index reached 85.12 today, its highest since at least 1999, and has appreciated 3.7 percent in the past six months. The krone’s strength, as measured by the index, exceeds a September 2011 peak triggered by the Swiss National Bank (SNBN)’s decision to cap franc gains versus the euro. Back then, Norway’s central bank responded with successive rate cuts to counter a capital influx.

“So far, the negative rates only apply to a small universe of clients, but the line has been crossed,” Daragh Maher, a currency strategist at HSBC Holdings Plc (HSBA), said in an interview from London. “The Swiss franc will remain under downward pressure. The flipside to this is that the Norwegian krone will offer a safe haven role, but retain positive rates.”

Policy Dilemma

That’s adding to a dilemma for policy makers at Norway’s central bank, who have signaled the economy now needs higher rates to stem a housing bubble and prevent the labor market from overheating. Norway, which has a $660 billion wealth fund and the biggest budget surplus of any AAA rated nation, has been used by investors as a haven from Europe’s turmoil. Credit default swaps suggest Norway is the world’s safest investment.

Governor Oeystein Olsen has indicated he may raise rates as soon as March to cool growth in Western Europe’s largest oil exporter. He has kept the benchmark rate at 1.5 percent since March this year, after cutting it by 0.75 percentage point over two meetings.

The krone gained 0.2 percent to 7.3318 per euro as of 3:07 p.m. in Oslo.

Gains in the import-weighted krone index have already surpassed the Norwegian central bank’s forecasts. Policy makers predicted the index would average 87 this year before appreciating to 85.75 in 2013, according to the bank’s latest Monetary Policy Report. In 2011, the rate averaged 88.1. A lower reading indicates a stronger currency.

Rate Cut?

Persistent krone appreciation may increase the chances of a rate cut, according to Nils Knudsen, a rate and currency strategist at Svenska Handelsbanken AB (SHBA) in Oslo.

“If the krone continues to strengthen gradually, I think expectations of a possible cut in the medium term would, as a consequence, increase,” he said. “Current pricing from the front forward rates suggest no change in the key rate in 2013. The risk is that an even stronger krone going forward could put pressure on these contracts on the downside, hence putting in place a probability of a cut in the medium term.”

While the surging krone is hurting exporters such as Norsk Hydro ASA (NHY), policy makers are seeking to contain a run-away housing market. Home prices are surging at an annual rate of more than 7 percent and private debt burdens next year may exceed 200 percent of disposable incomes, the central bank estimates.

Erica Blomgren, a chief strategist at SEB AB (SEBA) in Oslo, said in a note on Dec. 4 that any further krone strength will put the bank in a “tough position.”

Negative Rates

The Swiss National Bank’s key rate is at about zero, while the European Central Bank’s benchmark is at 0.75 percent. A higher rate boosts returns for currency investors. Credit Suisse is said to be imposing rates as low as minus 1 percent for institutional cash balances, according to three people with knowledge of the fees.

Switzerland’s central bank imposed a cap of 1.20 francs per euro in September 2011 to protect the economy from haven flows after investors pushed the exchange rate toward parity. In Denmark, the central bank has set a negative rate to limit the appeal of its krone and defend a peg to the euro. That’s prompted banks in the U.S., Canada and Sweden to start charging clients for their krone-denominated deposits.

Olsen has so far rejected a cap in Norway, saying in April that the country has “other measures.” He said in June that the currency’s appreciation is a natural outcome of Norway’s divergence from Europe’s crisis outlook.

Forward Contracts

Norwegian three-month forward-rate agreements for March was at 1.89 percent today down from a high of 1.96 percent last month. The contracts settle to the three-month Norwegian interbank offered rate, which was at 1.89 percent today.

The krone has gained 5.6 percent versus the euro and 6.2 percent against the dollar this year. Norway’s statistics office said today it estimates the krone will average 7.2 per euro in 2013, compared with 7.5 this year.

Norway is drawing investors as oil wealth generated from its offshore deposits over the past 40 years has allowed the economy to withstand the worst of Europe’s debt crisis. It costs less to insure against a default of Norwegian government debt for five years using credit-default swaps than it does to guard against non-payment on U.S. government debt. Norway’s default swaps traded at 17 basis points yesterday, compared with 37 for the U.S., according to data available on Bloomberg.

Growth Outlook

The central bank predicts the mainland economy, which excludes oil, gas and shipping, will expand 3.75 percent this year. That compares with a 0.4 percent contraction in the euro area, according to European Commission Nov. 7 forecasts.

Norway’s statistics office today cut its estimate for growth in the nation’s onshore economy in 2013. Mainland GDP will expand 2.9 percent next year, versus a previous estimate for 3.1 percent, the Oslo-based office said. Growth will accelerate to 3.5 percent in 2014, it said. That compares with a contraction of 0.3 percent for 2013 and an expansion of 1 percent the following year in the 17-member euro area, according to European Central Bank estimates published today.

Norway’s “AAA rating obviously is still appealing, especially as markets are questioning a little whether other AAAs will remain in place,” HSBC’s Maher said.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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