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FX Strategy: Year-End Repeat? Look To Rebuy NOK But Timing Not Yet Right

Published 11/20/2018, 02:06 AM
EUR/NOK
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NOK/SEK
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EUR/NOK has broken autumn trading range to the topside

Near-term NOK should be traded tactically; risks skewed towards more weakness

Fundamental predisposition remains to buy NOK vs EUR; SEK before year-end

EUR/NOK has broken the topside of the last months' trading range and we have subsequently broken through our revised stop-loss on our short position (9.6425). We book a profit of 1.0% (incl. carry). We kept on the position in early November because we saw a decent likelihood of a technical break below 9.40 from e.g. higher Nibor fixings. However, our position has suffered from the collapse in the oil price and recent NOK/SEK selling.

Going forward, the NOK should be traded tactically; we see the balance of risk skewed for more temporary weakness. The key arguments to stay tactically cautious on NOK are:

1) Norges Bank (NB) monetary policy is unlikely to get repriced in the short term even if the NOK is now 2.4% weaker than pencilled in by the central bank. Key releases to look out for from a strategic perspective are the NAV labour market report (30 November), the oil investment survey (22 November), wage drift stories and not least the Regional Network Survey (4 December). Alongside global developments, these releases will be instrumental for our call for the NB December rate path (13 December). We still expect the next hike in March.

2) Global macro momentum, USD to remain a headwind for oil prices in the near-term.

3) Choppy risk tends to be a headwind for the NOK (itself a small market risky asset).

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4) Structural NOK liquidity set to become a NOK negative from here (Chart 3).

5) Nibor fixings trading at elevated levels relative to external drivers (model approach).

6) Investor awareness of how the NOK tends to weaken in November and December.

7) NOK momentum is stretched but otherwise little support from technicals . E.g. EUR/NOK 100D-MA to break above 200 DMA on Thursday for unchanged spot.

In the near term, the key levels to look out for are 9.7293 and 9.8038 in EUR/NOK as well as 1.0600 and 1.0566 in NOK/SEK. Our fundamental predisposition for 2019 remains to buy NOK vs the EUR and SEK. However, we do not think the timing is right now .

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