FxWirePro: Short Kiwis against Norwegian Krone in spot trade as risk-neutral and bullish oil proxy

NZD crosses continue to make fresh multi-year lows, NZDUSD with the next major technical target 0.6350 – the 2016 low. The main causes of the decline have been US related (e.g. NZ-US yield differentials, US economic data), and that dynamic should persist during the week ahead. This week’s NZ calendar remains low key for the NZDUSD market, but the US calendar does contain Sep CPI on Fri. 

While the relative commodity prices and central bank outlooks continue to support AUD outperforming NZD. 

We book profits on long NOK position vs SEK two weeks ago. In the interim oil has gained another $6 yet remains $5 below our end-2018 projection of $90. 

We consequently view the recent setback to NOK - the TWI has slipped by a percent or so - as providing reasonable enter levels to re-buy what remains a fundamentally cheap oil currency. Of the potential pairs, we focus on NZDNOK in large part to neutralise what is often the Achilles heel for NOK - its sensitivity to risk and the tendency of consensus longs to exit at the first sign of trouble in equities.

We would expect NZD to prove at least as vulnerable as NOK in such a bearish risk scenario, thereby mitigating one of the key tactical risks to holding NOK. In addition to its more favourable risk characteristics, NZDNOK is surprisingly well correlated to oil, approximately 80% over the past five years (refer above chart). Courtesy: JPM

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards -85 levels (which is bearish), hourly USD spot index was at -41 (bearish), while articulating (at 15:07 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex