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Bearish USDNOK: Oil Breakout & Macro Trend of Weaker US Dollar

Bearish USDNOK: Oil Breakout & Macro Trend of Weaker US Dollar

2016-04-26 18:15:00
Tyler Yell, CMT, Currency Strategist
Share:

Point to Establish Short Exposure: At Market with Stop At 1.4515

Spot: 8.16654

Target 1: 7.9400 61.8% Retracement of May-January Range

Target 2: 7.2890 Base of Rising Wedge Pattern in May, Typical Target On Reversal

Invalidation Level: 8.3120 April 18 Weekend Gap High Post-Failed Doha Meeting

As of early April, traders are beginning to question whether or not we’ve seen ‘the bottom’ in WTI Crude Oil. If Oil has bottomed, there will be a lot of market narratives that will need to change, and some appear to be in the middle of such a change. One of the key changes has been around commodity currencies that were understandably sold aggressively in Q4 as Oil continually pushed lower and lower.

The flipside of the move higher in Oil is the move lower in the US Dollar. The Dollar move down took a distinct move after the G20 Summit held in Shanghai on February 26-27. There has been no confirmation of what was agreed to at this meeting, but many FX traders are suspecting that an agreement was made to put a lid on Dollar strength by global central banks.

Since the meeting, the US Dollar has fallen 8.65%, 7.08%, & 6.35% against the Australian Dollar, Canadian Dollar, and Norwegian Krone respectively. All countries are heavily dependent on commodities, which are inversely correlated to US Dollar strength, for their current account to be in the positive. As commodities have risen alongside a falling US Dollar, these currencies have risen, and may continue to do so through the year until the Federal Reserve changes their tone.

Specifically, the Norwegian Krone & Canadian Dollar are correlated to Oil, which has risen as much as 70% from the mid-February lows. On Tuesday, we heard from Bank of Canada Governor Stephen Poloz who noted that their economy has stabilized as Oil has in Q2.

Fundamentally, this has NOK looking rather positive as the market has priced in two cuts in 2016 while at the same time, the underlying components that support the Norwegian economy fundamentally are improving dramatically. Combining the improving fundamental NOK outlook with the commodity bounce, and the potential behind the scenes G20 Shanghai USD Accord, we could still have further room to run lower, which this analyst pick favors.

Multi-Year Chart Shows Long-Term Resistance Has Put A Lid on USD/NOK

Bearish USDNOK: Oil Breakout & Macro Trend of Weaker US Dollar

The chart above doesn’t help much with trading other than to show that we have moved aggressively higher since mid-2014. A retracement of much of the move could go a long way in hitting the target of the trade set-up shown on the chart below.

Chart-Pattern / Macro Trade

The chart below shows a broken rising bearish wedge pattern. The important thing to know about a rising wedge is that the target of the rising wedge is the start of the original pattern. Also, you’ll not there is an overlay of the positively correlated USD/CAD on top of the USD/NOK Chart. While rising in a similar fashion, USD/CAD has out-paced USD/NOK on the downside. If USD/NOK begins to close the gap, this trade could play out nicely.

Additionally, the price channel (red) and the Ichimoku Cloud continue to act as resistance. As long as those tools contain price the technical environment favors further downside.

Bearish USDNOK: Oil Breakout & Macro Trend of Weaker US Dollar

Key Technical Levels:

USD/NOK – Trading cleanly within a bearish channel on the breakdown of a bearish rising wedge pattern

2nd Resistance: 8.37904 April Opening Range High

1st Resistance: 8.3120 April 18 Weekend Gap High Post-Failed Doha Meeting

Spot: 8.16650

1st support: 7.9400 61.8% Retracement of May-January Range

2nd support: 7.2890 Base of Rising Wedge Pattern in May, Typical Target On Reversal

Trade Setup:

I am looking to sell USD/NOK at the market with a stop above the April 18 Weekend Gap High Post-Failed Doha Meeting AT 8.3120. Price action should be volatile as WTI Crude Oil (CFD: USOil) & Brent Crude (CFD: UKOil) Get comfortable in the new bullish territory.

Recent CFTC data via the Commitment of Traders report shows that Hedge Funds have become net-short the US Dollar for the first time since Summer 2014 when the major US Dollar uptrend began. If this trend continues, it could continue to move the market in my favor by breaking below 61.8% Retracement of May-January Range at 7.9400. A trailing stop would be used above an opposing up-fractal on the daily chart so that the trade aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

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