These two currency pairs benefit from the oil rally

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The Norwegian krone and the Canadian dollar have been the best performers among the G-10 currencies in recent weeks, thanks to their strong correlation with oil prices.

Against the Japanese yen – traditionally one of the currencies most affected by rising oil prices – NOK / JPY and CAD / JPY rose 5.6% and 5.1% respectively over the past month.

The Noki and Loonie have also outperformed all other major currencies since the start of the year and their relative strength may not yet be near an end, given analysts’ bullish short-term price forecasts. petrol.

Bank of America advanced the $ 100 / bbl call this winter amid strong demand pressure in the northern hemisphere, while Goldman raised its forecast to $ 90 / bbl by the end of the l year, as we recently discussed here.

YTD performance of the main cross FX – Credit: Koyfin

Why CAD / JPY and NOK / JPY are strongly correlated with oil prices

International trade figures, such as trade deficits and surpluses, are an important factor shaping foreign exchange markets. While Norway and Canada are among the world’s largest net exporters of fuels, the Japanese economy is heavily dependent on imported energy.

According to EIA statistics, JapanThe domestic energy consumption of is almost seven times higher than the domestic production. For this reason, Japan ranks as the fourth largest importer of crude oil and the largest importer of liquefied natural gas (LNG) in the world.

On the other hand, Canada is the world’s fourth largest producer of oil and other liquids, as well as the third country in terms of proven oil reserves, while around 40% of NorwayThe country’s export revenues come from the oil and natural gas sector, which also contributes around 15% of the country’s GDP.

Image of net exporters and importers of mineral fuelsTop 10 Net Exporters and Importers of Mineral Fuels (2019) – Data: OEC

The correlation between NOK / JPY and CAD / JPY with Brent crude has always been strong, as shown below. When oil prices rise, the value of the Canadian dollar and Norwegian krone against the Japanese yen also increases, and vice versa.

Image of NOK and CAD against JPY and oil priceNOK / JPY, CAD / JPY and Brent correlation – Credit: Koyfin

More hawkish monetary stance has supported NOK and CAD

Soaring energy prices were not the only reason the loonie and noki have strengthened in recent months, as monetary policy divergences began to emerge between G-10 central banks and that forex investors are starting to see them as a differentiator.

The Norges Bank and the Bank of Canada are certainly on a different political path than the Bank of Japan (BoJ), which still remains marked by an ultra-dovish stance. At the last meeting in September, Norges Bank raised its benchmark interest rate to 0.25% for the first time after Covid, signaling 4 more hikes to 1.25% by the end of 2022.

Although interest rates remained unchanged at the last Bank of Canada meeting, a cut to its purchasing program of $ 2 billion per week is already on the board’s mind, with the possibility of seeing the first increase in mid-2022.

These monetary policy developments still seem a long way off for the BoJ, which is still grappling with negative interest rates.

The bond market is a reliable thermometer of monetary policy divergences between central banks, as evidenced by the spread between the Norwegian and Japanese 10-year rate, which has returned to its highest level since 2019.

Graph of the 10-year Norway-Japan spread against the foreign exchange rateNorway-Japan spread at 10 years vs NOK / JPY – Credit: Tradingview

NOK / JPY Technical analysis

The Norwegian krone is currently hovering around 13.64 against the Japanese yen, up 25% from 52-week lows.

The 50-day moving average has just passed the 200-day moving average, forming what is known as the “golden cross” – a technical pattern indicating an uptrend.

The 14-day RSI [relative strength index] – a momentum indicator that tracks the speed of recent price movements – stands at 71 and has been floating in the overbought zone since October 11.

The greatest multi-year resistance is at the psychological level of 14.00, which corresponds to the highs of October 2018. A breakout of this level could increase the possibility of a move to the next resistance level, in area 14 , 30-14.40, around the highs of September 2017.

Profit-taking behavior or a sudden return of risk aversion sentiment could test the first support line at 1:30 p.m.

Image of NOK / JPY technical analysisNOK / JPY technical analysis – Credit: Koyfin

CAD / JPY technical analysis

The Canadian dollar is trading at 92.00 against the Japanese yen, thanks to a strong uptrend since the April 2020 lows.

Prices are 5% above the 50-day moving average and 18% above 52-week lows. The 50-day moving average recently saw a further rise and has been above the 200-day average for over a year.

The 14-day RSI recently moved out of overbought territory, which had held steady since the second week of October.

CAD / JPY has broken two major resistance levels at 91.13 (June 2021 highs) and 91.64 (September 2017 highs) and may consider the 93.15-93.25 area as the next level of resistance, which corresponds to the highs of November 2015.

The first support line is at 91.12 and a breakout of this level could increase the possibility of causing the pair to test the 50 day moving average levels.

CAD / JPY technical analysis imageCAD / JPY technical analysis – Credit: Koyfin

Traders’ sentiment on NOK / JPY and CAD / JPY

According to the latest data from Capital.com, traders’ sentiment is bullish on NOK / JPY, with 100% of buyers, but bearish on CAD / JPY, with 72% of sellers.

Among G-10 currencies, sentiment is slightly long on EUR / JPY, with 53% of buyers, while Capital.com traders are positioned net short on other crosses against the JPY.

Picture of sentiment among major currency tradersTrader sentiment on the CCY / JPY – Data: Capital.com

The difference between stocks and CFDs

The main difference between CFD trading and stock trading is that you don’t own the underlying stock when trading an individual stock CFD.

With CFDs, you never actually buy or sell the underlying asset that you have chosen to trade. You can still benefit if the market moves in your favor, or suffer a loss if it moves against you. However, with traditional stock trading, you enter into a contract to exchange legal ownership of individual stocks for money, and you own that equity.

CFDs are leveraged products, which means that you only need to deposit a percentage of the total value of the CFD trade to open a position. But with traditional stock trading, you buy the stocks for the full amount. In the UK there is no stamp duty on CFD trading, but there is when you buy stocks.

CFDs come with overnight costs to hold trades (unless you are using 1-1 leverage).

which makes them more suitable for short term trading opportunities. Stocks are more normally bought and held longer. You can also pay a commission or brokerage fees when buying and selling stocks.

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Capital Com is an execution-only service provider. The material provided on this website is for informational purposes only and should not be construed as investment advice. Any opinion that may be provided on this page does not constitute a recommendation of Capital Com or its agents. We make no representations or warranties about the accuracy or completeness of the information provided on this page. If you rely on the information on this page, you do so entirely at your own risk.


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