USDNOK Rallying on Falling Oil Prices, but Gas May Soon Run Out

The USDNOK has been in rally mode for the last two weeks, when the Norges Bank explicitly pushed back its timeline for hiking interest rates to the end of next year (vs. the middle of 2015 previously). In fact, the central bank even hinted that it may have to cut interest rates in the interim to revive economic growth.

Another fundamental factor that has been weighing on the Norwegian krone is the falling price of oil. Norway is Europe's largest oil producer, as well as the world's third-largest natural gas exporter, so the performance of the krone is closely linked to fluctuations in the price of oil. As my colleague Fawad Razaqzada noted earlier today, oil has pulled back on “easing of worries about supply, combined with concerns over demand.” As long as oil prices remain under pressure, the NOK may stay on the back foot.

Technical View: USDNOK

Turning to the chart, the technical picture also appears to support further gains in the USDNOK. The pair carved out a clear inverted Head-and-Shoulders pattern below the 6.00 level from early April through mid-June, breaking decisively above the neckline after the dovish Norges Bank statement two weeks ago. This pattern shows a shift from a downtrend (lower lows and lower highs) to an uptrend (higher highs and higher lows) and tends to mark a meaningful bottom on the chart.

As you would expect, the MACD shows strong bullish momentum, trending higher above its signal line and the “0” level. However, there is a potential concern for USDNOK bulls: the RSI is deeply overbought, at its highest level (78) in years. While it may be a short-term concern, the only way for an indicator to reach overbought territory is through an overwhelming amount of buying pressure. At the end of the day, this is a bullish indication from a longer-term perspective, though buyers may want to tread carefully over the next week or so.

Looking ahead, the measured move target of the inverted Head-and-Shoulders pattern comes in around 6.1850, another 100 pips from the current market rate. Above there, the 78.6% Fibonacci retracement of the February-May drop comes in at 6.2125; given the one-sided trading of late, the rally is likely stall out around these levels for a potential correction.