FOCUS: Norway's Krone Sticks At Nine-Year Highs; No Snapback Seen

FOCUS: Norway's Krone Sticks At Nine-Year Highs; No Snapback Seen

-- Krone surges in line with Brent crude
-- Currency catching up with other commodity-related peers
-- Market participants think Norges Bank won't cut interest rates to stem EUR/NOK decline


LONDON (Dow Jones)--The Norwegian krone is pinned at a nine-year high with little chance of a turnaround as the price of oil--one of one of the country's main exports--soars.

The euro traded as low as NOK7.4850 against the krone Monday, marking the Norwegian currency's highest level since January 2003. That's an extension of a rally that left the krone and the New Zealand dollar neck-and-neck as the strongest-performing major currencies in the world last week.

The trigger: the price of Brent North Sea crude oil surged over $121 a barrel to a nine-month high Monday following the European Union's proposal to block the supply of Iranian oil as a part of a raft of economic sanctions.

It would take a big shock now--particularly official intervention--to knock the krone off its perch.

"As long as the [euro zone] debt crisis does not escalate, thus causing Norway's economic outlook to deteriorate massively and increasing deflationary risks, we do not see any likelihood of Norges Bank intervening actively on the foreign exchange market," Frankfurt-based Antje Praefcke, senior currency strategist for Commerzbank, said in a note to clients Monday.

The Federation of Norwegian Industries is pushing for Norges Bank to lower interest rates to cap the strength of the krone, which it believes is hurting Norwegian industry.

But that seems unlikely for now. Last week, Oystein Olsen, governor of Norway's central bank said lowering interest rates could amplify an upward spiral in house prices and lending. Some market participants think interest rates are likely to stay on hold until March 2013.

That leaves oil in control for now--directly and indirectly.

The krone's tendency to move in line with oil is weaker than that of other currencies, such as the Russian ruble and even the Australian dollar, said Daragh Maher, foreign exchange strategist at HSBC Holdings PLC in London. So to an extent, the currency is playing catch-up with peers.

But it's not just the price of a barrel of oil that matters. "An increase in foreign interest in petroleum equities has been a driver for krone strength, causing it to act like a commodity currency, like the relationship between the Australian dollar and the S&P 500 [stock index]," said Carl Hammer, chief currency strategist at SEB in Stockholm.

Whatever the reasons, few see a turnaround yet, even as the euro has already crumbled under the NOK7.50 level that both UBS and SEB had seen as a near-term target. Commerzbank's analysts say any rise to NOK7.55 in the euro should be used as an opportunity to load up on new positive krone bets.

At 1255 GMT, the euro traded at NOK7.4981 against the krone, while Brent crude traded at $120.76 a barrel.