These two forex pairs are reaping benefits of the oil rally
The Norwegian krone and the Canadian dollar have been the best performers among G-10 currencies in recent weeks, thanks to their strong correlation with oil prices.
The Noki and the Loonie have also outperformed all other major currencies since the beginning of the year and their relative strength may not yet be near its end, given analysts’ bullish short-term forecasts on oil prices.
Bank of America brought forward the $100/bbl call as early as this winter amid elevated demand pressure in the northern hemisphere, while Goldman raised its forecast to $90/bbl by year-end, as we recently discussed here.
Why CAD/JPY and NOK/JPY are strongly correlated with oil prices
International trade figures, such as trade deficits and surpluses, are an important driver shaping forex markets. While Norway and Canada are among the leading net exporters of fuels in the world, the Japanese economy is highly dependent on energy imports.
According to EIA statistics, Japan’s domestic energy consumption is nearly seven times higher than 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 petroleum and other liquids producer, as well as the third country in terms of proved oil reserves, while about 40% of Norway’s export revenues come from the petroleum and natural gas sector, which also contributes for around 15% of the country’s GDP.
The correlation between NOK/JPY and CAD/JPY with Brent crude has historically been strong, as shown below. When oil prices rise, so does the value of the Canadian dollar and the Norwegian krone against the Japanese yen, and vice versa.
A more hawkish monetary stance supported NOK and CAD
Soaring energy prices were not the only reason why the Loonie and the Noki have strengthened in recent months, as monetary policy divergences have started to emerge among G-10 central banks, and forex investors are beginning to see them as a differentiating factor.
Norges Bank and Bank of Canada are certainly on a different policy path than the Bank of Japan (BoJ), which still remains marked by an ultra-dovish stance. In the last September meeting, Norges Bank raised its benchmark interest rate to 0.25% for the first time post-Covid, signalling 4 more hikes to 1.25% by the end of 2022.
Despite interest rates remaining unchanged at the bank of Canada’s last meeting, a tapering of its $2 billion a week purchase program is already on the board’s mind, with the possibility of seeing the first hike in mid-2022.
These monetary policy developments still seem to be 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 can be seen from the spread between the Norwegian and Japanese 10-year yield, which has returned to its highest level since 2019.
NOK/JPY Technical analysis
The Norwegian krone is currently hovering around 13.64 against the Japanese Yen, up 25% from the 52-week lows.
The 50-day moving average has just crossed above the 200-day moving average, forming the so-called “golden cross” – a technical pattern indicating a bullish trend.
The 14-day RSI [relative strength index] – a momentum indicator which tracks the speed of recent price movements – stands at 71 and has been floating into the overbought area since October 11.
The greatest multi-year resistance stands at the psychological level of 14.00, which corresponds to the highs of October ’18. A break of this level could increase the possibility of a movement towards the next resistance level, in the 14.30-14.40 area, around the highs of September 2017.
Profit-taking behaviours or an abrupt return of the risk-off sentiment could test the first line of support at 13.30.
CAD/JPY Technical Analysis
The Canadian dollar is trading at 92.00 against the Japanese yen, on the back of a strong bullish trend since April 2020 lows.
Prices are above 5% from the 50-day moving average and 18% from 52-week lows. The 50-day moving average has recently seen a new rise and has been above the 200-day average for more than a year.
The 14-day RSI recently exited the overbought territory, which had been maintained since the second week of October.
CAD/JPY broke two major resistance levels at 91.13 (June 2021 highs) and 91.64 (September 2017 highs) and could look at the 93.15-93.25 area as the next resistance level, which corresponds to November 2015 highs.
The first line of support is at 91.12 and a break of this level could raise the possibility to bring the pair to test the 50-day moving average levels.
Trader sentiment on NOK/JPY and CAD/JPY
Among G-10 currencies, sentiment is slightly net long on EUR/JPY, with 53% of buyers, while Capital.com traders are positioned net short on other crosses against the JPY.
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