Overvalued Norwegian Krone Seen Gaining More on Rate Advantage

(Bloomberg) -- The Norwegian krone is among the most overvalued currencies against the euro, but that isn't stopping analysts from predicting a second year of gains.

The krone is trading almost 30 percent above its fair value against the common currency, an OECD measure based on purchasing power parity shows, making it the most expensive after the Swiss franc among Group-of-10 peers.

Still, analysts say the krone may rise gradually as oil prices climb and fears of stoking a housing bubble prevent Norway's central bank from easing further, maintaining the currency's yield advantage. The median forecast in a Bloomberg survey is for it to strengthen to 8.74 versus the euro by year-end, from 8.88 currently and 9.09 as of Dec. 31. That implies a 4 percent advance in 2017, after last year's 5.7 percent appreciation.

“Purchasing-power parity is a very long-term measure which can be useful for valuation on a five- to seven-year horizon,” ING Groep NV strategist Petr Krpata said in emailed comments. “For commodity currencies such as the Norwegian krone, it could be distorted. Assuming euro-zone political risks fade, the krone should do modestly well due in part to its positive rate differential against the euro.”

Still, the Norwegian currency could pare gains in the short term amid euro-area political risks, before starting to strengthen again, he added. ING predicts the krone will retreat toward 9.00 per euro in the coming weeks before rising to 8.80 over the next 12 months.

The Norwegian currency has been extending last year's gains as Brent crude prices have averaged near $56 per barrel so far in 2017, compared with $45 in the whole of 2016. Norway is western Europe's biggest crude exporter.

Norges Bank's benchmark rate is currently at 0.5 percent, compared with the European Central Bank's deposit rate of minus 0.4 percent and the main refinancing rate at zero.

“On a 12-month horizon, we project the euro-krone cross to move lower to 8.70, on not least a normalization in growth, real rates spread and valuation forces,” Danske Bank A/S analyst Kristoffer Kjaer Lomholt said in emailed comments.

• The krone weakened 0.2 percent to 8.8846 per euro on Thursday; it reached a 19-month high of 8.7889 on Feb. 22
• Norway manufacturing PMI rose to 52.6 in February, data showed on Wednesday, from 51.7 in January

To contact the reporter on this story: Love Liman in Stockholm at jliman1@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma