USD/NOK darts higher as Norges Bank cuts interest rates; warns of a recession

USD/NOK darts higher as Norges Bank cuts interest rates; warns of a recession

  • The USD/NOK pair rose after the Norwegian central bank makes a surprise rate cut.
  • The bank warned that the country was going through a recession due to coronavirus.
  • The Norwegian economy has also been hurt by low oil prices.

The USD/NOK pair rose slightly after the Norwegian central bank delivered a surprise interest rate decision. The price is also reacting to the upbeat crude oil prices.

Interest rate decision
USD/NOK rises after surprise interest rate cut

Norges Bank interest rate decision

The Norwegian central bank concluded its two-day monetary policy today and slashed interest rates to zero. This was a surprise move because most analysts polled by Bloomberg and Reuters were expecting the members to leave rates unchanged. The bank also said that it would continue supporting the economy by providing adequate liquidity in the market.

In the monetary policy statement, the bank warned that the national and international economies were going through their biggest test in decades. Governor Olsen predicted that the Norwegian economy would contract in the second quarter and then rebound as containment measures are eased. He said:

“In the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely remain at today’s level for some time ahead. We do not envisage making further policy rate cuts”

The Norges bank has done several things to cushion the Norwegian economy. First, in March, it lowered interest rates by 250 basis points to the current 0.2 per cent. By lowering rates, the bank wanted to encourage consumption and lower the cost of borrowing in the market.

Second, the bank entered into dollar swaps with the Federal Reserve. This action helped ensure that there were enough US dollar in the market. Finally, the bank has increased liquidity by providing F-loans worth billions of dollars to banks.

Unlike other central banks like the Fed, ECB, Bank of England, and RBA, the Norges Bank has avoided taking the path of quantitative easing. Instead, it has focused on ensuring that there is enough money in circulation in the economy.

Norway addressing two key challenges

The Norwegian government and central bank are addressing two key challenges. First, the coronavirus pandemic has caused immense pain to the economy. The economy contracted by 1.9 per cent in the first quarter, which was the worst weakness since the last financial crisis. With the pandemic continuing, analysts expect that the second quarter will be worse.

In addition, the economy contracted by 6.4 per cent when you exclude oil and gas production, according to data from Statistics Norway (SSB). Worse, the numbers showed that the economy may have shrank by a whopping 15 per cent in April alone.

In general, SSB said that the economy would shrink by 5.5 per cent this year, its worst performance in decades. Analysts polled by Reuters were expecting a decline of 3.6%. According to SSB, barring another pandemic, the economy will bounce back by 4.7 per cent in 2021. In its statement, the Norges Bank predicted that the economy would decline by 3.8% this year and rise by 5.0% in 2021.

Other data from the country have been disappointing. Retail sales have cratered and consumer confidence has declined to the lowest level since 2007. Similarly, the manufacturing PMI declined to 42.0 in March while the services PMI has also contracted. At the same time, the unemployment rate soared to a record 14.7 per cent in March, according to data from Labour and Welfare Agency (NAV).

At the same time, the USD/NOK pair is reacting to low oil prices. As the second-biggest oil producer in Europe, Norway is affected by the price of oil. As shown below, the price of Brent has dropped by more than 50 per cent this year. This has contributed to the 17 per cent gain of the USD/NOK pair this year.

USD/NOK vs crude oil
USD/NOK vs crude oil price

Brent crude oil and USD/NOK performance YTD

USD/NOK technical outlook

USD/NOK
USD/NOK technical outlook

On the four-hour chart, the USD/NOK rose to an intraday high of 10.3567 after the rate decision. This price was along the 50-day EMA and slightly above the 23.6% retracement level. Therefore, I expect the pair to move slightly higher ahead of the US jobs numbers that will be released later today and tomorrow. On the other hand, a move below 120.2066 will invalidate this price action because it is along an important support level.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.

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