FxWirePro: What’s cooking in oil driven currencies after inventory check?

It seems that the OPEC countries decided on a cut in production at their informal meeting in Algiers in a surprise move.

The details will only be worked out in time for the next official meeting in November. The prospect of rising oil prices supported CAD and NOK.

However, we urge caution: a deal will have to be reached first! So please hold back on the euphoria.

We are still not looking for a significant breakout of USDCAD above the range highs of the past several months. For one, the BoC’s expressed downside risks are more centered around the US growth and business investment outlook itself, while the central bank remains optimistic on domestic upside drivers, including a strong bounce back from the Alberta fires, and fiscal stimulus feeding through.

In other words, the realization of these risks would assume more weakness in the US data, which would presumably undermine the USD leg of USDCAD as much as the CAD leg.

Hence, we stick to a view for USDCAD to stay in its 1.27-1.33 range this year, with a better pattern of trend strength emerging in mid-2017, targeting 1.25 for end-Sep 2017.

Despite increased policy sensitivity to downside risks, the baseline still looks for a strong 2H rebound from the Alberta fires bounce, the increasing feedthrough of fiscal stimulus, and an oil supply adjustment that pushes crude prices towards 60 in H2’17.

NOK is undervalued on both short-term models and longer-term metrics. Our high-frequency model puts fair-value for EURNOK at 8.80.

The forecast assumes that EURNOK closes the mispricing versus short-term models through next year. The Q2’16 forecast is kept at 9.00; the new Q3’17 forecast extends the gradual downtrend to 8.90.