Is it time to cut the Nokkie some slack?

USDNOK made another record high today, as the Nokkie further entrenches its position as the worst performer in the G10 FX space so far in 2015. The dip below $50 in Brent crude oil, a fresh 6-year low, earlier today was a reminder of how strongly correlated the NOK is to the oil price.

But is it time for a break in the selling pressure, if only for the short term? Brent crude is rallying today and is back above $50, while the energy sector is a top performer on the FTSE 100 so far on Wednesday, up nearly 1.4% on the day. Key movers in this sector include Tullow oil, up more than 3.5% so far, BP up 1.3% and Royal Dutch Shell is up by 1.8%. Even AIM listed Gulf Keystone is joining in, rallying more than 7% at one stage today.

It would take a brave person to call the bottom in the oil price right now, as the momentum still seems to be to the downside, however, the rise in USDNOK has been so sharp in recent days that we think this pair could pull-back in the coming days for both fundamental and technical reasons:

Fundamental:

1, Watch FOMC minutes this evening – if the tone is slightly less hawkish than expected then we could see a reversal in the USD.

2, Oil has fallen 15% since the start of the year and it’s only the 7th Jan. This may be a good time for a breather. Realistically, how much more bad news can it price in?

Technical:

1, USDNOK is approaching a key level of resistance at 7.9820 – the 61.8% retracement of the 1985 extreme high to the 2008 low. We would expect some hesitation around this level as it is an important long-term level of resistance that is being watched by the market.

2, The market loves whole numbers, so we could see the Brent price oscillate around the $50 per barrel mark for a little while before making a break lower or embarking on a recovery.

So what’s next?

The long-term outlook is still bleak for the NOK. We think that the Norges bank could embark on more easing this year, particularly if the ECB embarks on QE later this month. The economy could also take a hit as oil is the economy’s largest export. In contrast, the economic fundamentals remain supportive for the USD. We are also hesitant to call a bottom in the oil price, and could see further steep drops for the price of crude that could weigh on the Nokkie for some time yet.

However, we still think that the rise in USDNOK has been too far, too fast, and it is due a pullback, especially as we approach the key resistance level noted above. USDNOK has already backed away from today’s multi-year high at 7.8440. Key short-term support lies at 7.6800 – an intra-day low from Tuesday, then 7.60 – a sticky former resistance zone (now support) from earlier this week.

Takeaway:

• The long-term outlook for the NOK remains bleak, but we could see USDNOK pullback from fresh multi-year highs.

• USDNOK is approaching a long-term Fib resistance level at 7.9620, which could cause the market to pause.

• The Brent price could also be sticky around $50 per barrel after a sharp fall since the start of the year, which may also reduce the selling pressure on the NOK.

• In the long-term we continue to be NOK bears, but we could see a pullback in the short term to the lows of recent days.

• Ultimately though we think the market will break above 7.9620, which would open the way to 8.00 and beyond.