The "kNOK-On" Effects of Oil's Drop

The big story in global markets today is yet another leg lower in oil prices. As my colleague Fawad Razaqzada discussed earlier, WTI oil was testing key support in the 75.00-76.00 zone, while the Brent contract was pressing against key psychological support at 80.00 ahead of today’s crude oil inventory data.

Interestingly, the report actually showed that inventories declined by 1.7M barrels, compared to a rise of 0.7M expected, but as always, the market reaction was more telling than the actual data. Both oil contracts dropped through their key support levels to new 4-year lows; as we go to press, WTI is trading down over 2.5% on the day at 75.00, with Brent down by a similar amount to 79.00. For now, the path of least resistance remains to the downside for oil, and the recent downtrends may extend toward  the lower-70.00s in both contract next.

Last week, we discussed the implications of the drop in oil for FX traders, concluding that oil-dependent currencies may extend their recent weakness. Not surprisingly, USDCAD has caught a bit of a bid today, with the pair rising 60 points off its 50% Fibonacci retracement at 1.1300, and USDRUB has also gained value today, though there are a number of other major crosswinds buffeting that pair for the moment.

USDNOK: The kNOK-on Effect

However, USDNOK may be the most interesting pair to watch if oil prices continue their drop. Norway derives nearly 70% of its exports from crude oil and petroleum products, representing 20% of GDP, so changes in the price of oil have a massive impact on the nordic nation’s economy. A look at the daily chart reveals that rates have not rallied in sync with oil prices thus far today, though the longer-term uptrend remains healthy.

More immediately, the pair has already put in two Bullish Pin Candles*, or hammers, this week, suggesting that buyers are eager to step in and support the pair on short-term dips. Meanwhile, the RSI indicator has pulled back from overbought territory (>70), potentially clearing the way for another leg higher heading into next week.

As we noted last week, the pair needs to break key previous / Fibonacci resistance at the 6.8630 level to pave the way for a continuation toward psychological resistance at 7.00 or even the 11-year high near 7.30 in time. As long as rates remain above bullish trend line support (currently 6.62) and oil prices remain under pressure, USDNOK bulls will have the upper hand.

* A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.

Source: FOREX.com