Currency strategists and investors are seizing on Norway’s kroner as it weakens to the lowest in over a year, betting the currency will rebound from near the bottom towards the top of the Group of 10 (G10) ranking.

Societe Generale SA (SocGen) has a long position on the kroner against the dollar as a key trade recommendation in the second half, while Bank of America Corp (BofA) says it is undervalued and sees a rebound. Investors including Russell Investments are buying.

What’s luring them is Norway’s interest-rate advantage over the euro area - currently at 75 basis points - as well as the kroner’s cheapness. The currency has tumbled about 8% versus the dollar and nearly 7% against the euro this year, making it the worst performer in the G10. On Thursday, it breached 12 kroner per euro, slumping to its weakest level since May 2023.

“The NOK looks very, very cheap to us,” said Van Luu, global head of currencies at Russell, a US$300 billion [RM1.4 trillion] money-manager which has been snapping up the kroner  since February. “It’s quite rare that we’re positioned long the NOK, but right now the valuation seems pretty compelling.”

The kroner was one of the main casualties of the dollar’s rally this year, built on expectations the Federal Reserve will take longer than initially expected to cut rates. Selling picked up this month after a surprising slide in Norway’s inflation rate boosted expectations of a rate cut in December.

Still, policy easing in the Nordic country will likely take longer than in its main peers. The European Central Bank has already reduced rates in June and is expected to do so again in September and possibly in December. The Fed is seen delivering at least two cuts this year, with the first coming in a couple of months.

At the same time, Norway’s economy is growing faster than forecast and outperforming on other scores. The nation boasts the strongest current account surplus in developed Europe and among the lowest rates of unemployment, BofA strategists note. 

BofA forecasts the kroner will erase year-to-date losses versus the euro by the end of 2024, and strengthen about 6% next year. SocGen expects it to reverse the drop against the dollar this year. 

Not everyone thinks the kroner can muster gains. Andreas Koenig, head of global FX at Amundi SA, remains unconvinced, given its history as a laggard.

“Wherever I am, I get asked why is NOK isn’t stronger,” Koenig said. “These people are long, and they’re not happy with it. So it’s a pain trade.”

"FX traders are leaning against this month’s rally for EUR/NOK in the options space, with surging volumes amid higher implied volatility. This suggests positions are building for a quick reversal lower leading into the policy meeting by Norway’s central bank in mid-August, which is almost a month before the next ECB gathering," said Mark Cranfield, strategist for Markets Live at Bloomberg Strategists.

The smallest and most illiquid of the G10 currencies, the kroner is often vulnerable to broader moves in the FX market, struggling when market participants become risk averse.

“The kroner sells off really easily,” said SocGen’s head of FX, Kit Juckes. “A lot of people get into it and get disappointed once it starts weakening.”

It’s also exposed to the constant buying of foreign currencies by the Norges Bank on behalf of the government, which deposits tax revenues generated by the nation’s energy sector into the sovereign wealth fund.

Still, Pictet Wealth Management says the currency is worth holding as it offers exposure to Europe without the shadow of French political turmoil hanging over the euro.

“Issues such as the mini crisis we just had, with respect to the French election” bode well for the kroner, said Michael Hart, a senior FX strategist at the firm. “When OAT spreads widen, NOK has actually performed well. We are actually quite positive on NOK.” 

  - Bloomberg