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Away from trade clashes, crude oil is re-emerging on macro radars as a potential petro-FX catalyst. The rally in Brent to $70/bbl this week, partly on inventory data and in part due to geopolitics (Iran), did not benefit our NOK longs (short EURNOK and long NOKSEK) to the hoped-for extent amid the risk-off tone to markets, and leaves them looking cheap with room for catch-up.
Along similar lines, CAD is on our watch list as a potential buy once decibel levels around protectionism ebb.
Press reports this week suggested a major American concession in NAFTA discussions on the US content of auto exports from Canada and Mexico, which ought to shrink part of the sizeable risk premium in the currency (refer 1st chart), while inflation now running above target in both core and headline will cap the amount of dovishness BoC will feel comfortable delivering.
Monetary policy to be more decisive than oil prices. The oil performance has been instrumental in boosting the currency in 2017, even though the long-term picture suggests that the currency has overshot the rebound in oil prices.
However, the CAD is on the right track to remain strong: the interest rates factor is taking over from the commodity factor. CAD rates recently climbed above USD rates for the first time since 2014 (refer 2nd chart), and our USD rates projections can realistically drag the USDCAD to 1.20.
Bearish NOK scenarios, if:
1) Crude oil supply tracks higher than expected. Brent reverts to low $40s.
2) Economic recovery loses impetus, inflation falls further and Norges Bank reinstates an easing bias.
Bullish NOK scenarios, if:
1) Crude prices increase further
2) Growth accelerates on the lagged impact of oil recovery,
3) Norges Bank upgrades rate path further and expedites the start of the hiking cycle to 2018
Trade perspectives:
Stay long in 1M vs short 2M USDCAD call no-touch calendar @1.3150, in 0.8:1.0 ratio notionals, spot reference: 1.2826 costs 4.8%USD.
Stay tactically long spot NOKSEK and short EURNOK.
Longs in 3m NOKSEK 1.0661.092 call spread vs EURSEK 9.95 put.
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