Norway scores on the ice and on the currency market

While Norway is amassing Olympic gold, the country sold its real gold reserves years ago. Yet, the krone is at its highest point in two years. This isn't the result of high oil prices, but mainly of high inflation.

Thanks to Xandra Velzeboer's gold medal win on Tuesday in the 1.000-meter short track speed skating, the Netherlands is climbing back up the medal table. Currently, Norway holds the leading position. That country also won the most gold medals in 2022 and 2018. Norway could certainly use that precious metal. In 2004, the Scandinavian country sold the last of its gold reserves. Since then, it has been one of the few developed countries to pursue a gold-free strategy. Norway still has seven gold bars held for exhibition purposes and a collection of gold coins, but its official reserves consist of foreign currency, bonds, and other securities.

More than an oil tailwind
Norway's economy relies much more heavily on a commodity other than gold. The country hovers around eighth place in the global oil export rankings, with a share of about 4%. Sales of over 1,5 million barrels of oil per day generate approximately $50 billion in annual revenue. Naturally, this amount fluctuates with the oil price. Historically, this has often been the case for the Norwegian krone as well. The fact that the price of a barrel of Brent crude has risen by over 5% since the turn of the year is a boost for the currency. But while the current oil price is still well below the peaks of the past twelve months, the krone has reached its highest point in over two years. Clearly, there's more going on than just an oil tailwind.

Inflation setback
The krone is benefiting on currency markets from the Norwegian central bank's policy. Despite two interest rate cuts by 2025, the current rate of 4% is much higher than in many other Western countries. The European Central Bank, for example, has a policy rate of 2%. At a meeting earlier this year, the Norges Bank hinted that another interest rate cut wouldn't be expected before June. Central bankers in Oslo first want to see inflation better under control. Last week, it was announced that Norwegian inflation rose from 3,2% to 3,6% in January. Economists had expected a slight decline. The setback is mainly attributable to higher housing, energy, and transportation costs.

Six grams of pure gold
In the coming period, the tightness of the Norwegian labor market will be the biggest driver of inflation. Companies are luring employees with attractive salaries, so wages will rise by 4% to 5% this year. It remains to be seen whether Norges Bank will dare to lower the policy rate before wage growth slows down somewhat. Norwegian medal winners may feel the pinch of inflation slightly less than their compatriots, as gold has historically been a stable asset during periods of high inflation. But the difference is minimal, as a gold medal contains only six grams of pure gold. Meanwhile, every Norwegian who goes on holiday benefits from the strong krone, which could also gain ground against the euro and dollar in the coming months.

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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