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USD/NOK Consolidates After January Sell Off

USD/NOK Consolidates After January Sell Off

2016-02-18 14:15:00
Jeremy Wagner, CEWA-M, Senior Strategist
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USD/NOK has been in an impressive rally for the past 2 years as crude oil prices slide lower. Since the start of 2016, prices have quietly been selling off and appear to be consolidating before another break lower. Using technical analysis and wave measurements, the January 6 high came at an interesting price juncture.

First of all, the high on January 6 occurred near the 1.618 extension of the April 2008-March 2009 up trend. Alternating waves in this fashion tend to have Fibonacci or equal wave measurement. Therefore, the price at which USD/NOK turned lower suggests the market thinks that level is important.

Fundamentally speaking, the January 6 high is peculiar considering equity markets have been under pressure to start the year. Norway’s sovereign wealth fund, the largest in the world, is funded by the nation’s oil. So the trend of oil prices plays a role in future growth of the fund.

The fund also has significant international exposure of which nearly 60% of its holdings are in the equity space. Therefore, if oil and equity markets continue to slide, this may pressure the fund to sell off some of its assets to raise cash. Selling assets to raise cash insinuates selling international holdings to repatriate NOK currency back to the homeland.

USD/NOK Turns at Wave Measurement

USD/NOK Consolidates After January Sell Off

[Image 1]

Add to this dissipating rate hike expectations for the Fed and the US Dollar may be under pressure for a while. This creates pressure to the downside of USDNOK.

There are a couple of technical hurdles in the way should a move lower transpire. First, the 200 day simple moving average arrives near 8.32. Secondly, the 1 year linear regression channel hovers in the similar price zone. This suggests that if prices do begin to sell off, we’ll likely see a struggle near 8.30-8.32.

Should a break lower prove successful, the secondary target arrives near 7.60.

Market Interpretation

Market Condition: Breakout

Bias: Short USD/NOK

Entry: 8.5320 (February 18 low)

Stop Loss: 8.6600 (February 15 high)

First Target: 8.3200 (200 Day Simple Moving Average)

Second Target: 7.6000 (just prior to 38% retracement of 2011-2016 up trend

Though the market is pricing in no Fed rate hikes for the rest of 2016, improving economic conditions in the US could surprise and the Fed could keep pressing the gas. Therefore, selling the USD/NOK may be difficult since the multi-year trend is to the upside and the Fed is potentially blowing wind in the sails. Therefore, one can still expose themselves NOK appreciation by hedging off the US Dollar exposure by buying USD/SEK. This essentially creates a synthetic long NOK/SEK trade.

This article ropes together a discussion of crude oil, equities, and Fed rate hikes. Read the quarterly forecast for crude oil, equities, and the impact rates hikes (or lack thereof) may have on these three markets. [free registration required].

Regardless of how you plan to enter this or any other trade, be disciplined on your risk levels. We’ve researched millions of trades, we found that this one little tweak on risk to reward ratios increased the pool of traders who were profitable from 17% to 53%. Learn more about that tweak in pages 7-9 of the Traits of Successful Traders Guide [free registration].

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