Natural gas and interest hurt Nokkie and Loonie

At the beginning of April, OPEC announced that oil production will fall, while demand for oil has reached a record level this year. The impending tightness in the oil market leaves currencies such as the Canadian dollar and the Norwegian krone cold.

It is much slower than in the spring of 2022, but the fire under the oil price is being stoked again. At the beginning of April it was announced that OPEC and Russia had decided to reduce oil production by more than one million barrels per day. The adjustment came as quite a surprise. Oil prices had fallen somewhat in recent weeks as traders feared that the problems in the banking sector would put a brake on global economic growth. But the banking turmoil soon passed and oil consumption is on the rise. Shortly after the OPEC meeting, IEA announced that total consumption will increase by 2 million barrels per day this year to a record level of 101,9 million.

Oil price back to square one
After a short dip, the price of a barrel of Brent oil has rebounded since mid-March to just over $80. As a result of this intermediate sprint, the oil price has returned to the level of the period between the beginning of November and the end of March. Shortly after the outbreak of the conflict in Ukraine, that was just over $ 100, but the current price is a lot higher than the approximately $ 60 of previous years. However, remarkably little of this is reflected in the exchange rate of oil currencies such as the Canadian dollar and the Norwegian kroner. The Nokkie - as the latter currency is called - is even the worst performing G10 currency of 2023. The krona has fallen by 10% against the euro.

Oil? No: natural gas and interest!
There are several causes for the Nokkie's weakness. In the first place, of course, the oil price only tells part of the energy story. The other ingredient is the natural gas price. And this fell sharply during the winter due to the mild winter and all the energy measures in Europe. In addition, the Norwegian central bank only raised interest rates in 2023 by a small step at the end of March. That is a big difference with the speed at which policy rates in the eurozone and the United States will rise this year. The policy of the local central bank is also playing tricks on the Canadian dollar. In the North American country, interest rates have not yet been raised throughout 2023.

Nokkie and Loonie
The result of this wait-and-see attitude is that the Loonie (nickname of the Canadian dollar) is slightly lower than at the end of last year. In March, inflation in Canada fell from 5,2% to 4,3%. As long as that decline continues, the Bank of Canada has little reason to raise rates again. In Norway, with an inflation rate of 6,5%, that is a different story. In 2021, the Norwegian central bank had the first in the G10 with an interest rate hike. A new interest rate move in the course of the spring can give the Nokkie a much-needed boost. Otherwise, this may happen due to rising oil prices as a result of tightness in this market. The prospects for the Nokkie are therefore slightly better than for the Loonie.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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