Norway Enters The Currency Wars

While the G-20 and the G-7 haggle among each other, all (with perhaps the exception of France) desperate to make it seem that Japan’s recent currency manipulation is not really manipulation, and that the plunge in the Yen was an indirect, “unexpected” consequence of BOJ monetary policy (when in reality as Richard Koo explained it is merely a ploy to avoid the spotlight falling on each and every other G-7/20 member, all of which are engaged in the same type of currency wars which eventually will all morph into trade wars), Europe’s energy powerhouse Norway quietly entered into the war. From Bloomberg: “Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said. “If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo.

The problem for Norway is that on one hand it, too, seeks to boost its export-business in an imitation of the beggar-thy-neighbor policies adopted by every other government, or artificial monetary union, with a printing press, while on the other, its property market which is overheating due to Norway’s perceived status as one of Europe’s safest money parking locations (alongside Switzerland) will merely heat up even more should the Norges Bank cut rates as it appears set to do, in order to preserve its front in the global currency war.

Olsen and his colleagues are torn between protecting exporters through lower rates that stem krone gains, and a policy that addresses an overheated property market. Western Europe’s largest oil exporter, which boasts the biggest budget surplus of any AAA rated nation, has emerged as a haven from the euro area’s debt crisis.


The krone sank as much as 0.6 percent against the euro following Olsen’s comments. Versus the dollar, it dropped as much as 1.4 percent. The krone was little changed at 7.3939 per euro as 11:57 a.m. today.


“A pronounced weakening of growth prospects, or a krone that is too strong, may over time lead to inflation that’s too low,” Olsen also said in the text of his annual speech held yesterday in Oslo. “Such development would be counteracted by monetary policy measures.”

Some will see in Norway’s actions the germ of the same ruinous policies enacted by Ben Bernanke:

Low interest rates and falling unemployment have boosted private borrowing, with household debt estimated to swell to more than 200 percent of disposable incomes this year, according to the central bank. House prices, which rose an annual 8.5 percent last month, have surged almost 30 percent since 2008, almost doubling in the past decade. “Household debt and house prices are still moving up,” Olsen said. “These are the key reasons why the key policy rate hasn’t been lowered further.”


The dilemma has spurred debate on the extent to which monetary policy should target asset bubbles, or whether rates are too blunt a tool. The central bank will start advising the Finance Ministry on how much extra capital banks need to hold in their counter-cyclical buffers next month. That follows a proposal to triple minimum risk weights on banks’ mortgage assets to 35 percent and a separate recommendation to limit the use of covered bonds to finance mortgages.


Although growth in our part of the world is weak and real interest rates are low, many banks are still operating with high return targets, which could lead to excessive short-term risk taking,” Olsen said. “Banks and their owners should accept that return on equity will be lower, but also safer in the years ahead.”

Yet while hurting domestic home buyers, a weak FX policy will certainly help home sellers and everyone else looking to flip assets for a quick gain – a process that has taken the entire developed world by storm once more – and will most certainly aid exporting mega corps such as Norsk Hydro.

Companies such as Norsk Hydro ASA, Europe’s third-largest aluminum maker, have struggled to adjust to a stronger krone, which is pushing up export prices even as demand from Europe declines. The krone reached a record on a trade-weighted basis yesterday. Demand has left the currency 41 percent overvalued versus the dollar this year, topping 12 major currencies, according to calculations from the Organization for Economic Cooperation and Development.


Olsen also said yesterday the bank has no plans to talk the currency “up or down” and no “specific” level for what too strong means.

We may have heard that one before.

“It’s appropriate to use a few years to bring up inflation,” Olsen said. “Prices for Norwegian goods have increased considerably more than consumer prices, reflecting the improvement in Norway’s terms of trade. Incomes, output and employment are rising at a solid pace.”

Few years? Hasn’t Mr Olsen heard that in Japan Abe plans on talking up the USDJPY by some 20% in a matter of months, and at last check economy minister Amari had a 13,000 Nikkei target by the end of March. Surely if a central bank does not stick to such a ridiculous hourly schedule it will lose all credibility. Or something.

As for Norway, its formal entry into the global FX war will likely take place next month:

The bank left its benchmark interest rate at 1.5 percent for a fifth meeting in December and signaled it may raise rates as early as next month to cool record debt growth.

The conclusion:

Norway’s politicians, central bankers and business leaders have joined forces in a push to weaken the currency. Kristin Skogen Lund, chief executive officer of the Confederation of Norwegian Enterprise, said krone gains were the “main” reason Norway’s exporters have a cost disadvantage.

And with that we return to the regularly scheduled C-grade gameshow infomercial straight from the G-20, titled: “The FX price is wrong; or let’s lie to everyone just a little more.

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