The sell-off in commodity currencies over the past two weeks has hit the Norwegian krone particularly hard, but according to one strategist the decline is "overdone" and the krone is set for a rebound.
Since June 17, the krone (NOK) has weakened 6.5 percent against the dollar to 6.0795 and 4.11 percent against the euro to 7.9325 amid concerns that the U.S. Federal Reserve would scale back its stimulus program and after weakness in the Norwegian economy prompted the central bank to delay a rate hike.
While the krone has the attributes of a safe-haven currency with Norway's 'AAA' rating and large current account surplus and foreign exchange reserves, it tends to trade more like commodity currencies such as the Australian and Canadian dollars.
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"The scale of the recent NOK weakness suggests the market fears we are witnessing a repeat of 2008 when global concerns caused a rash of position unwinding, with an especially pronounced impact on those currencies that were less liquid," David Bloom, currency strategist at HSBC, said in a note on Friday.
"We believe the sell-off in the Norwegian krone is overdone. The exaggerated decline of the NOK was partly a "catch up" to earlier weakness elsewhere in the FX market against the U.S. dollar. It is not likely to be repeated."
HSBC forecasts the krone will strengthen to 7.10 against the euro by year-end despite the recent weakness.
"We believe in fundamentals, we believe in the NOK," Bloom said.
Norway is forecast to grow a healthy 2.8 percent in 2013, according to the country's data agency and the country has sizable fiscal and current surpluses.
Until recently the country's central bank feared the potential impact of a runaway housing market and low unemployment, as it pledged to hike rates to cool the economy. In late June, however, against a tide of rising unemployment and falling exports, the central bank delayed a rate hike and even said it could cut rates in September.
"Despite some softer data recently, Norway's GDP is set to outstrip its G10 peers. The more dovish stance of the Norges Bank is already in the price," Bloom said. "Now that these shifts have been made, the currency is better placed to capitalize on its cyclical strength, with growth likely to outstrip others in G10, and its ever-present structural appeals."
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Bloom said the euro's weakness against the dollar in recent weeks has added to the krone's woes. But, he said, investors should look to the krone for its safe-haven properties at a time when gold has lost its luster.
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"The krone is not simply an alternative store of wealth, like gold for example. It offers strong fundamentals, both structural and cyclical…Gold is a quasi-currency, NOK is the real thing. It does not simply reflect flows and sentiment. It is a currency that will reflect its economic fundamentals. These remain strong."