Buying the krone

NOK/SEK looks like it is a potential long from here (1.0917 at the time of writing) and I would be looking for a move to the 20-day moving average of 1.1148.

Euro
Source: Bloomberg

I would also look to exit the trade on a daily close below the July 1 low of 1.0847.

Given there is a real lack of trending conditions I would be keeping position sizing small, potentially adding to the long position on a move through 1.1079 (the 38.2% retracement of the September to October Sell-off).

Looking at yesterday’s candle (on the daily chart), we can see good buying off the July low and this has caught my attention, however the pair is still below the 200-day moving average.

Perhaps the fundamentals make more of a bullish case here and thus I feel the techincals will play catch-up. Looking at the swaps market, there has been big move up in favour of NOK (if we look at a forward swap spread), which as you can see from price action of late is yet to be priced in. The pair is also correlated with risk sentiment as well and as the Volatility Index spikes the pair has found sellers. Given we have heard now from Federal Reserve members James Bullard and John Williams that the Fed could continue with QE3 rather than close off the program in its October meeting, we could see volatility subside and this could put a bid in NOK/SEK.

Norway is also massive exporters on energy and while it is big trading partners with Europe, so is Sweden. Technically both WTI (West Texas Intermediary) and Brent crude printed a bullish outside day reversal, with price trading below Wednesday’s low and closing nicely above its high. Naturally we need to see follow-through buying to confirm the reversal. Again better days in the energy complex could put upside in NOK/SEK.

Other catalysts include upcoming central bank meetings with the Norges bank meeting on October 23 and the Swedish Riksbank on October 28. Recall Sweden is seeing deflationary pressures and thus I expect a dovish narrative from the central bank.

 

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