• Tenuous Breakout from 2-Month Trading Range
• Negative Divergence Between Momentum and Price
• Fundamental Case for a Stronger Norwegian Krone (NOK)
At the end of January, USDNOK broke out of a stubborn two-month trading range between 6.05 and 6.22, and so far, the pair has peaked just above 6.31. An objective price target after such a breakout would be the 6.39 area. However, the question now is whether this breakout will hold, especially when considering the negative divergence between momentum, as measured by the Relative Strength Index (RSI), and price, both on the daily and weekly time frames.
Besides this negative divergence, a rising wedge formation has also developed, and in most cases, this pattern ends with a bearish reversal of the current trend (which is currently defined by higher highs and higher lows).
USD/NOK Rally Meets Resistance
Support: 6.20, 6.10, 6.05, 5.95
Resistance: 6.30-6.32, 6.40, 6.50
Given the recent flight to safety and prevailing risk-off sentiment, especially towards emerging markets, the US dollar (USD) has gained quite a bit against major currency counterparts such as the Australian dollar (AUD) and Canadian dollar (CAD), and also against emerging currencies like the Norwegian krone (NOK).
As for now, the risk remains high for another test of the breakout area near 6.20, but again, with clear divergence on both the daily and weekly time frames, we may also put in a potential top near current levels and establish a new downtrend with lower highs and lower lows on the longer-term time frame.
As part of the interaction with the rising wedge formation, price recently touched the upper trend line just above 6.31 and failed to hold the gains. The lower trend line may now provide support around 6.12-6.13 for now, but a break and close below this level might confirm a potential bearish reversal for USDNOK.
Fundamental Factors in Play for USD/NOK
Furthermore, fundamental factors support a stronger krone, as NOK is now running around 3% weaker than the Norges Bank forecast in December 2013. The recent January housing numbers from Norway show a healthy market, although with a lower price-development pace than last year.
On the other hand, inflation has remained unchanged, which also goes against the central bank’s forecast for the current period. Another factor that may support a weaker NOK is slow growth in retail sales, although improving economic conditions in both Europe and the US should help those numbers to slowly improve.
Overall, given the slowdown in oil investment, stronger export growth, and more breathing room for Norges Bank should keep the nation’s economy going, and may even surprise to the upside. Norway’s new government, led by Prime Minister Erna Solberg, supports easier bank lending policies for the upcoming year, which should also support the nation’s housing market and general investments.
Short Trade Idea for USD/NOK
Using half of a normal position, short USDNOK at current levels (between 6.26 and 6.31). Add to the position if we see a move higher to 6.38-6.40. The stop loss should be executed if USDNOK closes above 6.4050 on the daily time frame.
The price targets for this trade idea will be 6.10 and 5.95 using a one- to three-month time frame.
By Rafiul Hossain, Guest Contributor, DailyFX.com