Is the Norwegian krone now undervalued?

Although the Norwegian krone is on course to be the worst performing G-10 currency this year, having depreciated by almost 20% against the US dollar since January, we doubt that it is now significantly undervalued. Admittedly, the real effective exchange rate (REER) of the currency has fallen well below both its ten-year average and its ten-year trend. But Norway has experienced an adverse shift in its terms of trade as a result of the decline in the price of oil, which will have reduced the equilibrium level of the krone significantly. Accordingly, it is probably misleading to compare the current level of the REER with its level in the past. Granted, the price of oil appears to be finding some support around $60 per barrel. But we don’t expect it to rebound sharply, in which case the krone may not recover much either.