Loonie Tunes Part 2: Tracking The Potential Bottom In Oil And An Alternative Currency Play To The Loonie

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Includes: FXC, NOKS, USO, UUP
by: The Market Master

Summary

Oil looks to be progressing as expected toward it's longer term bottom with one more down move expected.

USD/CAD on track but still likely to see one more upside move before the larger interim top.

USD/NOK could be another winning short into 2016.

Before we start, we wanted to take this opportunity to wish everyone a Happy and fruitful 2016. As promised in our previous article on the CAD and Oil, we have started including the 2 into our weekly FX Week Ahead piece with charts and some fundamental analysis included. So do follow us every week as we track our initial road map layout for the CAD, Oil and 3 other currency pairs to see if our expectations pan out as expected.

A quick check on the technical picture for Oil (USO)

We continue to favor one more downside move for WTI oil (USO) at this time to finally form the potential longer term bottom in oil despite all the volatility so far and oil hovering at the top end of the bottoming zone. It is to be noted that this chart is the WTI continuous futures price chart instead of the previous spot price chart we used in our original article. The details of this, the technical picture update for oil and update for the CAD can be read on our FX Weekly article here, which you can follow weekly on Seeking Alpha to see how this road map plays out over the weeks. As for now, there is no change to our projected $29/barrel bottom on the WTI spot price. On the current futures continuous price chart that price level is between $31.80-$32.50.

In this article, we wanted to focus on another petrodollar currency opportunity to play the potential longer term bottom in oil once the bottoming technical conditions are met.

An alternative Currency to play the potential bottoming in Oil

USD/NOK

The Norwegian economy has long been known as an oil economy with over 60% of its exports coming from oil alone. The country has even managed to create the world's largest sovereign wealth fund with the oil proceeds that the government uses for the population and economy when needed. As such, it is not surprising that when oil prices collapsed, the Norwegian krone was hit baldy as a follow on move. The question now is, if a potential technical bottom for oil is in sight, could a significant top also be in sight for the USD/NOK? Going a little further, could this currency also outperform the CAD when a turnaround in oil prices takes hold?

Before going further though, let's look at some key data points in Norway and how the slide in oil has affected the country.

GDP Growth

Despite the fall in oil prices, Norwegian GDP growth has largely held up against expectations with the government dipping into its massive sovereign wealth fund to help prop up the economy. Some success has also been seen in the country's efforts to diversify the economy which has helped the country weather the oil drop better than other oil producing nations.

Inflation Rate

The drop in oil prices has not hit the country's inflation rate as badly as some other nations due to the country's energy independence. On the overall, the country looks relatively unscathed in terms of inflation from the oil price drop, which should keep the central bank from cutting interest rates for now, as long as economic conditions do not deteriorate significantly from here.

Balance of Trade

The one area that has been hit by a fall in energy prices is the Norwegian trade balance given the large contribution of energy to Norwegian exports. Nonetheless, prudent fiscal spending does seem to have helped to keep the trade balance in positive territory. It is still anyone's guess at this point though if these numbers begin to stabilize from here or if the downtrend would continue into the future. However, a recovery in oil prices would certainly have a positive effect on the balance of trade details.

TECHNICAL PICTURE

The USD/NOK looks to be approaching a wave 5 topping zone around the 9.1000-9.1500 region. Following this, a substantial gain in the NOK should be seen if that long term projected bottom in oil holds as we expect and no massive risk off scenario is seen in global markets. Depending on how big and how strong the bounce in oil will be from that projected bottom, USD/NOK downside technical targets are between 7.6000-8.4000 at this juncture based on the existing projections.

Conclusion

Despite the steep fall in oil prices, and some negativity in business confidence, the Norwegian economy has so far navigated the oil crisis relatively unscathed based on its existing macroeconomic data.

If the long term projected bottom in the oil price really does hold as expected, the NOK could become one of the best performing currencies into 2016 together with the CAD, with the potential for outperformance given the better economic fundamentals of the Norwegian economy relative to Canada.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.