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April 7, 2022

Norway and Switzerland’s ‘exorbitant privilege’

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Norwegian sovereign wealth fund and currency

Norway is one of the richest advanced economies in the world thanks to decades of oil exports. Revenues have been invested in the Norwegian sovereign wealth fund, managed by the country’s central bank, Norges Bank. Total assets recently exceeded 12 trillion krone – around USD1.3 trillion, making it one of the largest funds in the world.

As almost all assets are held in foreign currencies, the fund’s NOK value fluctuates substantially depending on exchange rate movements. In recent years, changes in market value and FX fluctuations have moved in opposite directions.

Thanks to surging oil prices, Norway has enjoyed significant windfall gains; its export volume has never been higher. This has resulted in a large appreciation of the krone – leading the central bank to intervene in FX markets again by buying large amounts of foreign currencies to prevent further increases. This could lead to substantial deflationary pressures in the domestic economy.

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Swiss central bank intervention

Switzerland’s central bank, the Swiss National Bank (SNB), seems to be taking a similar approach to control the franc. The safe haven currency, which tends to appreciate during times of global macroeconomic volatility and uncertainty, almost reached parity with the euro last month.  

Sight deposits, money held by financial institutions at the SNB, increased recently – which could be a sign the SNB has been buying foreign currency to prevent the franc from rising further.

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French election

It’s a face-off between incumbent president Emmanuel Macron and far-right leader Marine Le Pen.

As the chart below shows, every other candidate in the French presidential election now has almost zero chance of becoming the country’s next leader following the first round of voting. While polls give Macron a mere 6% margin of winning the second round, prediction markets still expect him to win – with odds exceeding 75%. Research suggests prediction markets are quite accurate and can outperform expert opinion and polling data. Let’s see!

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US credit card transactions rise

Consumers in the US are feeling the pain from soaring inflation and energy prices. High-frequency data from the US Bureau of Economic Analysis (BEA) shows credit card spending on gasoline recently surged to some 30% above normal levels.

Credit card transactions across other categories show key trends that emerged during and after the pandemic.

For example, card spending on accommodation plunged in 2020 due to various government lockdowns, remained depressed throughout 2020 and 2021, and only recovered very recently.

By contrast, spending on electronics and appliances soared as consumers cashed in government stimulus checks to improve life at home.

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US equities

While high inflation deters US consumers, equity investors are still riding high.

Typically, the US economy enters a recession around 12 to 18 months after the yield curve inverts. As this next chart shows, equities still tend to perform well between the start of an inversion – we used the spread between two-year and 10-year yields as the benchmark – and the beginning of a recession.

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China mobility

One factor behind rising global inflation is the supply chain crisis, which is being aggravated by yet another full lockdown in China as part of the country’s zero-Covid strategy. This next chart shows the impact of the lockdowns on subway traffic in major Chinese cities.

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Russia inflation

Finally, we revisit a chart first posted a few weeks ago to see where Russia inflation is heading as western sanctions continue to hurt the economy. The chart below overlays different year-to-date changes to compare the evolution of the CPI throughout the year.

Prices are rising much more sharply than in 2015, when Russia invaded Crimea. How much longer before inflation reaches double digits?

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