Fight for World’s Top Currency Plays Out Among Nordic Neighbors

(Bloomberg) -- Norway’s krone looks poised to clinch the title of the world’s best performing major currency this year, as a blistering rally that catapulted its neighbor to the top spot in 2020 begins to fade.

Bolstered by a nascent global economic recovery and the prospect of a hawkish shift by the central bank, the Norwegian currency is set to recover and gain around 2% against the euro through December, according to the median estimate of analysts in a Bloomberg survey.

That’s the most among Group-of-10 peers, beating the projected advance for Sweden’s krona, which took a hit this week amid speculation the central bank was moving to cap the currency’s strength after it climbed almost 5% last year.

The diverging outlooks underscore a shift in global currency markets as investors begin to look beyond the pandemic. While the krona enjoyed the tailwinds of its central bank keeping rates on hold as others slashed borrowing costs to prop up their economies, commodity-linked currencies are now coming back into vogue as the world recovers.

“This year should be the strongest year for the Norwegian krone in a decade,” said Petr Krpata, a strategist at ING Groep NV. If the growth outlook remains supportive, he expects the central bank could raise rates in 2022, adding that any hint of a move could push the currency some 1% higher to 10.10 against the euro by the middle of this year.

Danske Bank A/S’s Stefan Mellin, a senior analyst at the Danish lender, expects the currency to advance to the 10.20 mark, citing a rebound in global economic growth. The world economy is set to grow 5.2% in 2021 after shrinking 4.4% last year, according to forecasts compiled by Bloomberg.

Meanwhile, Brent oil futures have rallied around 8% since December, and on Wednesday briefly rose past $57 a barrel, the highest level is almost a year, a boon for Norway’s oil-exporting economy. Earlier this month, Goldman Sachs Group Inc. said it now expects oil to rally to $65 a barrel by the summer, compared with year-end previously.

Momentum for the krone’s advance is already building. The currency is up 1.9% so far this year against the euro, the most in the G-10, followed closely by other commodity-linked currencies such as the Australian and Canadian dollars.

Growth Bet

As the krone rallied, Sweden’s krona dropped to the bottom of the table among peers. It’s fallen around 0.5% this year, weighed down by the Riksbank’s decision this week to revamp its foreign reserves. While the central bank says a plan to start selling the currency isn’t motivated by any monetary policy objective, the move ignited bets it may use the new setup to cap krona gains to revive inflation.

That fits with mounting concerns among policy makers worldwide about currency strength hurting the economic revival. Yet for their part, investors are not worried about the krone’s recent strength for now, given it’s only just recovering from its biggest slide in four years.

“We still believe the krone is undervalued. It’s one of our favored currencies to outperform this year,” said Lee Hardman, a strategist at MUFG Bank.