Norwegian Krone turns bullish on rebound in oil prices

Norway is another country similar to Canada in the sense that it is also a commodity (oil) based economy. The Scandinavian country is the largest petroleum product producer in the Europe and the world’s third largest exporter of natural gas. The country derives 45% of its export revenue (20% of GDP) from the export of petroleum products.

The decline in the price of crude has weakened the currency against all the major currencies, including the Euro, in the past eight months. However, there are some solid reasons to believe that the EURNOK will reverse trend in the coming weeks.

Firstly, the price of crude has recovered from a low of $25 per barrel to about $40 per barrel in the past one month. There is little probability in the short-term for the price of crude oil to return to the $25 per barrel level. Thus, Norwegian Krone is expected to remain range bound with a bullish bias in the short-term.

Secondly, Norway’s Sovereign Wealth Fund, the money saved for the ‘rainy day’, has more than $830 billion (largest in the world) and is now being tapped to balance deficits, if any. It is the only commodity based economy with fiscal and current account surplus, at least until last year. If necessary, the country can easily undertake further stimulus measures.

Thirdly, the Central Bank of Norway, the Norges bank, maintains a positive interest rate of 75 basis points. On the other hand, a Negative Interest Rate Policy (NIRP) is followed by the ECB (European Central Bank) and the SNB (Swiss National Bank). Thus, the Krone is expected to strengthen in the coming weeks.

The consumer prices also rose 0.6% in January, compared to a contraction of 0.4% in December. Furthermore, the inflation in January was 3.1%, up from 2.3% in December.

The Norges bank also expects the GDP to rise 1.25% in 2016. Considering these developments, fundamentally, a trader can expect the Norwegian Krone to strengthen further in the coming weeks.

Technically, the EURNOK currency pair has formed a double top (9.74542) pattern. Thus, decline till the major support at 9.1947 is imminent in the currency pair. The decline is also confirmed by the formation of a bearish dragon harmonic pattern.

So, a forex trader should go short at the current price level of 9.4660. The profit can be booked at 9.20 levels, while the stop loss order can be placed above 9.5050. The trade carries an exceptional risk to reward ratio of about 1:8.

A one touch put option contract with target levels near 9.40 can be purchased by a binary options trader. Any expiry date in the last week of April would complement the trade.

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