Writing in a note dated today (Monday), he argues that Norway’s strong fiscal position, current account surplus and superior interest rate (2.25% versus 0.25% for Switzerland) make the krone undervalued against the franc and the euro.
Charting Swiss haven buying following the G7’s intervention to devalue the yen, Bloom and his team note with surprise the lack of upward pressure on the krone relative to the predictable buying of the franc. The less liquid franc has been under upward pressure ever since the Japanese quake.
“On all metrics that we consider, the NOK is more defensive than the CHF. However, the market has been buying the CHF in a frenzy of defensive activity while ignoring the NOK,” Bloom notes. “We believe this is a mispricing.
“In particular, those fleeing from the EUR and the fear of any possible systemic problems would be ill-advised to rush into the CHF. It does not offer safety from a break-up scenario or any systemic problems owing to its giant-sized banking sector. In this scenario, the NOK would be less exposed than the CHF.”
The bank notes that the krone has been trading in a tight 3% band against the euro since the start of the year, despite the fact that Norwegian fundamentals are far better than those of the eurozone. The major area of outperformance is Norway’s net debt to GDP ratio (which the IMF calculates as gross debt minus financial assets corresponding to debt instruments), registering a surplus of more than 150%. This ranks against a projected breakeven or small surplus for Switzerland.
Norway, helped by oil exports, also has a stronger current account balance than Switzerland. Bloom also notes the strong Swiss skew towards its banking sector – the ratio of its two biggest banks’ assets to GDP is the highest in the G10. On this basis, he argues, the franc does not provide a safe haven in the event of another banking crisis, even allowing for Swiss banks’ low exposure to peripheral sovereign debt.
Bloom does not suggest simply switching from franc to krone, however; he recommends buying both at the expense of the euro. He still recommends buying the Swiss franc, despite acknowledging that it is the most overvalued currency in the world on an OECD purchasing power parity basis.
“There is more value in buying all the beautiful against the ugly,” he concludes. “[But] in a risk-off situation, we believe there is no better currency than the NOK.”