(Bloomberg) --
Currency traders are hedging their bets on whether Norway can stick to hiking interest rates when other central banks are dialing back.
The krone is up nearly 3 percent against the euro this year, yet is still lagging gains among Group-of-10 countries such as Canada and Australia, where market speculation of a rate cut has increased. By contrast Norges Bank lifted rates last month and has signaled two more in the next year.
The Federal Reserve's dovish rhetoric and signs of weakening global growth have shifted the mood in markets and the krone has not been immune, even as Norway's economic data holds up. The currency has failed to follow through on gains in March after the central bank flagged another hike could come as soon as June.
“The market doesn't quite believe the Norges Bank stance -- only one and a half hikes are priced over the next year,'' said Jonas Goltermann, an economist at ING Bank NV in London. “Euro-krone could still be treading water around 9.60-9.70 for a while longer.''
The krone slipped 0.1 percent to 9.6622 per euro as of 1:33 p.m. in Oslo on Friday. The currency pair has mostly stayed in a 9.60-9.70 range in recent weeks. It has still recovered this year after sliding to a nine-year low in December above 10 per euro. Strategists picked it as a top performer at the start of 2019 on the outlook for rate hikes.
One-month risk-reversals in the euro-krone pair, a measure of positioning and sentiment in options, show demand for euro calls has increased since Norges Bank raised its policy rate in March.
Traders may be reluctant to put on fresh krone long positions too far in advance of any policy tightening after setbacks from previous bullish bets that have hurt them, said Karl Steiner, a strategist at SEB AB in Stockholm. The euro-krone pair has a tendency “to grind lower but shoot higher,” a risk for shorting it, he said.
“The krone remains the least liquid currency in the G-10 world, and if everyone wants to exit at the same time the sell-off could prove quite damaging,” said Alexandre Dolci, a currency strategist at BBVA SA.
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, Neil Chatterjee, Scott Hamilton
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