Case Study NOK/JPY: Trading The Exotics

One of the biggest differences between professional and amateur traders seems to be the ability to look at the markets in a subjective manner. Typically, the newer trader finds that some of the markets around them are “too risky” or “too volatile” to trade, and will avoid them like the plague. However, they are simply shorting themselves of many opportunities. One of the biggest reasons is that you can find currencies that follow specific drivers in a much cleaner manner. It is with this train of thought that I am looking at a particular pair at the moment.

The NOK/JPY pair is one that many of you will have absolutely zero experience trading, assuming that you have a broker that offers it. The Norwegian krone is a nice play on the oil markets because of two facts: The Norwegians are very active in drilling offshore in the North Sea, and it is a fairly minor currency.

The fact that it is minor means that it tends to have a monochromatic flavor to it – most currency traders can’t tell you anything about the currency other than it is oil related. This means that unlike the Canadian dollar, the markets will focus on one thing typically. (There are times when it isn’t oil but a specific issue with Norway, but this is very rare.) The Canadian dollar is a larger currency, and is also highly correlated with the employment situation and general economic health of America as it sends over 80% of its exports to the Americans. Again, because of this it is much easier to play oil with the NOK.
 
On the other side of the trade, you have the Japanese yen. Buying the yen has long been held as a safety trade; This makes sense as much of the world funds its trading in yen, and it is a much larger currency than the krone. In times of uncertainty, traders like the bigger currencies over the smaller ones because of general liquidity and safety. Needless to say, when there is a significant amount of uncertainty and fear out there, this pair should fall. In this way, it acts much like a GBP/JPY, EUR/JPY, or CAD/JPY pair.

Also, you should be aware of the fact that Japan imports 100% of its oil. Because of this, the yen is especially sensitive to oil shocks. As the oil markets are currently getting beat up, it would make sense that the NOK should fall, and the yen should benefit because of the fear. Because of this, you have a bit of a “perfect storm.” In this environment, I see fear, and I see falling oil prices – a perfect situation to short the NOK/JPY pair.
 
There is a lot of talk about the Bank of Japan working against the value of the yen and possible intervention. I can assure you that the BoJ has no concerns about the exchange rate of this pair. In fact, unlike most of the other pairs – the Japanese actually benefit from a strengthening yen in this market as it drives down the price of oil for them. As you can see from this weekly chart, we are coming very close to breaking this pair down at the moment.
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