By Naomi Tajitsu
LONDON, Oct 6 (Reuters) - Expectations of an imminent interest rate hike have made the Norwegian crown a darling of the currency market and, with Norway's oil-based economy buoyant, it looks set to retain that status for some time.
The Reserve Bank of Australia beat the Norges Bank to the punch in terms of monetary tightening, lifting its interest rate by 25 basis points to 3.25 percent on Tuesday and analysts expect Norway's central bank will follow suit later this month.
The crown has soared to a one-year high beyond 8.4 crowns per euro -- its most liquid trading counterpart -- since the Norges Bank last month all but promised to deliver a 25 basis point rate rise from 1.25 percent as early as its Oct. 28 meeting.
The bank is widely expected to hike at least once before the end of 2009, and take rates up to around 3 percent or higher by end-2010, as Norway's economy has survived the global recession relatively unscathed compared with other countries. This would catapult Norwegian rates above those of other countries -- U.S. and euro zone rates are essentially zero and a paltry 1 percent, respectively -- as many central banks are seen holding rates well into 2010. This differential is expected to help keep the Norwegian currency in demand.
"Most clients, especially foreign accounts, are long NOK (crowns) as Norwegian fundamentals appear strong and the central bank is likely to be the next (after the RBA) to raise rates this month," said Johan Javeus, chief currency strategist at SEB in Stockholm,.
The euro has tumbled 14 percent and the dollar 18 percent against the crown so far this year on expectations of widening rate differentials.
Even so, the crown has not quite retraced losses suffered after the Lehman crisis, and some analysts say this also keeps the door open for more gains. Risk aversion triggered by the investment bank's collapse pushed the euro to a lifetime high above 10 crowns in late 2008.
NORWAY LOOKS GOOD
Analysts see the euro retreating close to the 8.0 crown level before 2009 is out, but many acknowledge that excessive strength may require the Norges Bank to brake what is expected to be an aggressive rate tightening ride.
"The Norges will be keen to normalise rates as rapidly as possible, but will keep a close eye on both developments on the economy and also the currency," said Christian Lawrence, currency strategist at RBC in London.
"If they hike in October and we suddenly see Nokkie fly, we could see the Norges ... delay a second rise from December to February."
An excessively strong currency would keep imported inflation low, posing challenges to the central bank's remit to keep price increases around 2.5 percent. Core inflation has been running below that for months, coming in at 2.3 percent in August.
A rallying crown would also hike up the price of Norway's most precious export, oil, which may cut demand for the black gold which bankrolls the nation's buoyant economy.
But a general rise in global oil prices has contributed to the currency's rise, analysts say, and a climb in crude towards $80 per barrel would probably help the crown towards 8 per euro, although a collapse in prices may trigger a sell-off.
Some analysts say the current crown strength is hardly anything to get excited about, given that the euro has mainly traded in a 7.8-8.2 crown region since the euro's 1999 launch.
They say the number of long crown positions at the moment remains lower than 1-1/2 years ago when the euro was trading around 8 crowns, suggesting the crown has more room to rise.
"It seems investors who had burned their fingers betting that EUR/NOK would stay below 8 (in 2008) are still not back in the market," said John Hydeskov, currency strategist at Danske Bank in Copenhagen, citing positioning figures kept by the bank.
"It's still not a crowded trade yet so we still see a potential for establishing more EUR/NOK short positions."
Analysts say a bullish outlook for the Norwegian economy should also support the crown. Statistics Norway sees the economy expending 2.1 percent in 2010, more than many other countries.
And if overall growth were not enough, Norway also enjoys a current account surplus -- unlike many of its Western counterparts -- due to its oil exports.
With revenues from oil sales providing ample funds to pay for government initiatives, Norway holds little official debt -- something that is expected to mushroom in other countries.
"In relation to every other Western economy, everything looks good for Norway, it is weathering the economic storm very well," said Lawrence at RBC.
He added: "Considering the economy has been bearing up throughout this whole mess, it's surprising that NOK hasn't outperformed more."
(Editing by Nigel Stephenson)