From Oil to Finance: What Drives the Norwegian Krone Today?

Sammanfattning

This paper examines the determinants of the Norwegian krone (NOK) exchange rate against the US dollar over the period 2010-2024. The study focuses on whether the relationship between oil prices, global risk and monetary fundamentals has changed following the 2014 oil price collapse. Monthly data on NOK/USD, oil prices, global risk (VIX), the value of the Government Pension Fund Global (GPFG), interest rate differentials and inflation rate differentials are used. We estimate time-series regression models to analyze the relationship between these variables and changes in NOK/USD. To account for potential structural change, the model allows the effect of oil prices and global risk to differ before and after 2014. The results reveal that the Krones sensitivity to oil prices was strong and negative prior to 2014, but became statistically insignificant thereafter, while exposure to global risk (VIX) increased substantially and became significant in the period after 2014. Interest rate and inflation differentials, as well as short-term changes in the GPFG have limited explanatory power. Overall, the results indicate a structural change in the behavior of the NOK. From being primarily driven by oil fundamentals to being more influenced by global financial risks and investor sentiment, therefor we call this evidence “From Oil to Finance”. This suggests that policy analysis and exchange rate forecasts should pay more attention to global risk conditions than to commodity dynamics.