FxWirePro: Norwegian Krona stands out efficient among commodity space – Only EUR/USD weakness to cause risks in shorts of CAD/NOK

USD/NOK is a better short for higher oil prices than USD/CAD:

Better growth and the possibility of monetary policy divergence... The Canadian economy is struggling in the aftermath of the shale-oil boom’s end.

The manufacturing PMI has been falling for 6 months and employment growth has slowed to 0.6% per annum. Rates are low 50bp) but are likely to remain anchored even if the Fed hikes in December.

By contrast, the Norwegian economy is stabilising. The PMI is picking up and even if unemployment continues to trend higher, a shift away from falling investment in the petroleum sector to a pick-up in exports and a tailwind from the housing is helping the 2017 outlook.

This leaves the NOK better placed than the CAD to benefit from any further recovery in the price of oil and opens up the medium to longer-term, possibility of monetary policy divergence pushing CAD/NOK a fair bit lower.

Stay short in CADNOK at 6.0661 with the stop at 6.2259 (2.56%) and targets at 5.6 (7.68%) The carry almost exactly zero on forwards between 1-month and 1-year.

Risk-reversals were positively skewed by have fallen sharply, and volatility has picked up from summer lows, which makes a simple spot trade more appealing now than an option trade.

Risks: the only risks associated with above trade recommendation is that EURUSD slumps. There is a good long-term, correlation between CAD/EUR and EUR/USD where a falling EURUSD sees CAD out-perform NOK but in the last year, with more currencies rangebound, the r-squared on this correlation is just 0.05, so we worry about CAD outperformance only if we see EURUSD break below 1.06.

 Is a Trump victory in the Presidential election partly priced in to USDCAD? It clearly is partly priced in to USDMXN, but the positive impact on CAD of a Clinton win is likely to be small.