Why USD/NOK could be the next big trade.

Being a currency trader can be difficult for so many reasons. 

But one reason that goes under the radar is that there is a large amount of currency pairs to trade. 

On the one hand this is great as it gives us variety and means that there’s choice, but on the other hand it can be hard to keep up with. 

Every night on the market close I would open up my trading platform, start at EURUSD and make my way through each and every currency pair available to me, to look for a trading opportunity.

If I could go back to my younger self I would say stop that, I’d also tell him the future lottery numbers. 

But here we are!

Currency markets move on interest rate expectations…most of the time. Granted recently the market has been more focused on the fiscal policies from governments, but the market still tunes into interest rates. 

In a world where most central banks are cutting interest rates, we need to find a market that differs. And surprisingly I am not going to talk about the Japanese Yen (JPY). 

I know you’re in shock. 

Instead, we are going to talk about Norway, and the Norwegian Krone. 

I know for a fact that most retail traders don’t really trade the NOK, and that is largely because the spreads can be slightly unfriendly. But don’t be discouraged, as a swing trader it is important to identify opportunities based on high probability moves. 

So why the NOK? 

On the 27th March, the Norges Bank will decide on interest rates. They are likely to leave rates on hold at 4.5%. Not only this, there could be fuel for the central bank to hike interest rates this year. 

Here’s why. 

1. Unemployment rates: Back on the 27th February the data was released showing us that the unemployment rate in Norway fell. But it didn’t fall by merely 0.1%, it fell by 0.5% to 3.7%. That’s a big deal when it comes to interest rate expectations. If more people are working within Norway, then there is more money in the economy, it also tells us that the job market is pretty good. If people begin to spend in the economy, then demand could rise leading to higher inflation rates. 

2. Retail Sales: the unemployment rate wasn’t the only big surprise. Forecasts suggested that retail sales were coming in at -0.2%, however, they came in at 1.1%. Again, another huge surprise to the market. 

3. Inflation Rate y/y: now this is a biggie, remember how most central banks target a 2% inflation rate. Well, the annual inflation rate rose to 3.6% higher than the previous year of 2.7%, beating forecasts of 2.3%. So, the market was predicting lower levels of inflation, however, that was not the case at all. 

These factors contribute to interest rate expectations. If we see an economy performing well, then demand for goods and services will increase. That will directly affect inflation rates and then we all know what can happen from there. Interest rates could be hiked. 

This is reflected in Norway’s government bond yields which have risen to 4.1% up from 3.2% in August. In a way this shows us that investors think that inflation could be on the rise and that interest rates will remain relatively high. 

Norway is Western Europe’s largest oil and gas producer, with oil and gas exports accounting for a large portion of its GDP exports. Higher oil and gas prices tend to strengthen the NOK, lower oil and gas prices can weaken it. In fact oil and gas production in Norway is forecast to fall from this year until 2034. Less production often means less supply which could drive demand for the commodities. 

Now we have the analysis on Norway, we have to pair it with something else, being currency traders and all. 

Which brings us to the United States. The USD is under pressure, this is down to a number of factors which are the opposite to Norway. For example, the inflation rate came in lower, unemployment up-ticked ever so slightly, and retail sales provided some shock and awe. 

We can also combine this with the idea that Trump wants lower oil prices, driving CPI even lower, impacting potential interest rate expectations. 

Taking a look at the interest rate differentials there’s nothing in it. Both countries have an interest rate of 4.5%. So we have to look at the expectations, this comes from the difference between bond yields. 

Check this out! 

The chart is pointing lower, and throughout its history it shows that the currency pair USDNOK has a very strong correlation. This illustrates that traders expect to see a higher interest rate in Norway, than they do in the US. 

Look, this doesn’t mean we open up the USDNOK chart and go short, but this narrative could drive this market lower. The price is currently trading at a major support level of 10.49, so I would need to wait for some kind of pullback. 

I will personally be looking for strong rallies in USDNOK, in order to potentially short the market if we see the right conditions. 

Good luck out there traders!