USDNOK: Signs of a Bearish Reversal Off Key 7.8650 Barrier?

It’s been a rather lackluster start to what promises to be an action-packed week for traders. The only economic reports of note were Eurozone current account data from November (worse than expected at a €18.1B surplus) and Swiss PPI (slightly better-than-expected, though of course, not particularly relevant given last week’s SNB decision). Unfortunately, trading conditions in today’s US session may prove to be even more lackluster, with equity and bond markets closed for the Martin Luther King Day holiday.

Given today’s expected slow trading conditions, it’s worthwhile to take a look at the longer-term weekly chart of USDNOK. The US dollar has surged against its Nordic rival over the last few months, primarily on the weakness in oil prices, which represent about two-thirds of Norway’s total exports. Interestingly though, USDNOK has actually stabilized over the past two weeks, while both Brent and WTI crude oil have shed around $5 over that period.

Meanwhile, there are a couple of technical signs that USDNOK may be topping. For one, the pair is testing the 61.8% Fibonacci retracement of the entire 2000-2008 drop at 7.8650. In addition, the RSI indicator is deeply overbought, so a medium-term pause or pullback off this barrier would not be surprising. Finally, the pair has now put in back-to-back Bearish Pin*, or inverted hammer, candle patterns over the last two weeks, indicating an intraweek reversal from buying to selling pressure and increasing the likelihood of a top. Given the early signs of divergence between oil prices and Norway’s currency, key resistance level, overbought RSI indicator and bearish candles, probability favors a drop from the current elevated level.

After last year’s strong rally, even if a relatively shallow 23.6% retracement would represent another 2,000 pips of potential downside to 7.3895 in USDNOK, while a deeper pullback to the 38.2% Fibo could take rates all the way down to 7.0950. From an intermarket perspective, krone bulls should watch for signs of stabilization or a bounce in Brent crude oil to confirm a potential recovering in the NOK. That said, another leg lower in oil could take USDNOK through resistance at 7.8650 and herald a continuation toward 8.00 in USDNOK.

*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.