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The combination of the OPEC deal and the prospect of cuts by non-OPEC producers was a better-than-expected outcome for oil and our commodity strategists stay bullish, looking for Brent to reach $60/bbl in December 2017. Within G10, NOK stands out as an attractive candidate as it still appears cheap relative to rate differentials and oil prices.
Moreover, the central bank is expected to hold policy steady as growth appears to have bottomed and the balance of payments dynamic remains supportive. Admittedly inflation missed expectations this past week, but we continue to think that growth matters more for the Norges Bank, the outlook for which is better with higher oil prices.
On the other hand, CAD stands out as a candidate to short as it will be vulnerable if a hard line on trade emerges from the US (particularly around NAFTA). Hardly any concession is priced into CAD for any such political risk and Canada’s external position remains vulnerable with current account and basic balances both in deficit territory. Moreover, in the latest meeting, the BoC continued to be focused on disappointing business investments and nonenergy goods exports, while also hinting at a period of diverging monetary policy between the US and Canada (Bank of Canada remains on hold as widely expected, Dimino).
The combination of virtually no political risk priced into CAD, combined with cheap NOK valuations had prompted us to initiate long NOK vs. CAD on November 22nd. The trade also had a soft exposure to long oil prices pre-OPEC. We further increase our long oil exposure via NOK this week, recommending the longs vs. EUR.
Sell EURNOK at 9.0272 with a stop at 9.2070.
Short CADNOK at 6.35 with a stop at 6.5725. Marked at -1.57%.
Increase long exposure to oil; buy NOK vs. EUR outright to prior long NOK vs. CAD.
