Welcome back to the Logikfx Trade Ideas for this week we’re going through forex analysis for USDNOK. Jumping straight into some economic themes the recently released PMI data from July has shown Norway’s PMI slump to 43.3. Any numbers below 50 are contractionary for the economy and not always great for the currency.
This slump shows how the manufacturing sector in Norway has taken a hit and they’re not very confident about the future either which will trickle into the exchange rate values. March was the worst time for Norway as the PMI actually hit an 11 year low with the USDNOK exchange rate shooting up. Let’s see if we can identify any opportunities in the upside again.
Macro Currency Strength Meter - Logikfx
Some interesting data points on the Logikfx Macro Currency Strength Meters have seen both the USD and NOK being strong. What we’re really interest in though is the future potential of this currency pair. Due to the continuing impact of the pandemic we’re see weakening scores on the strength meter suggesting some future weakness may be imminent.
Norway has risen but most recently started showing decreasing scores, whereas USD has also been weakening but with a higher overall score.
What I’m doing is keeping an eye on the strength meter to wait for USD to be strong and NOK to slip into a negative score. This will really give me confidence in a long idea in the future to keep an eye on.
Gross Domestic Product (GDP) Differentials
During the analysis on GDP differentials for USDNOK we’ve accounted for over 40 years’ worth of data to create an accurate representation of future events. In the blue line we have the differential which goes up and down between 6% and minus 6% and in the orange line we have USDNOK exchange rate.
What we’ve identified are some interesting behaviours, generally when the blue line increases the orange line increases as long as the trend of the blue line follows. Looking at the last 10 years of data we’ve seen an upwards trend in the GDP differentials with USD looking to grow more than Norway going into 2021 even with the pandemic going on.
If the trend in GDP differentials does continue and meet forecasts set by the IMF we’ll see the numbers increase from 0.4 to 1.8 which should also see the USDNOK exchange rate follow suit.
Exxon Mobil Stock Analysis
Those of you who have been keeping on top of our trade ideas and forex analysis will understand why we’ve included Exxon Mobil a giant oil company in the United States. The main reason being the US exports and imports a lot of oil which impact the values of these companies and the currency value.
For example, in the last 20 years Exxon Mobil has had a 40% negative correlation against the USDNOK exchange rate. You can even see in the data during earlier this year when Oil prices hit an all time low and the pandemic lockdowns started happening the USDNOK exchange rate shot up and the Exxon Mobil share prices dropped significantly at the same time.
This is why we’ve included it in the analysis because Norway is one of those commodity floating exchange rate regimes where they’re also heavily impacted by the prices and volatility of oil so it makes sense to include one of America’s top oil companies.
West Texas Intermediate (WTI) Oil Analysis
Similarly we’ve also included WTI because it’s an even stronger commodity to include due to Norway’s reliance on oil exports. You can see as WTI crude oil prices increase the USDNOK exchange rate drops, and when the WTI prices fall USDNOK rises! Similar inverse relationship we’ve seen with Exxon.
Due to prices rising for WTI oil the current returns aren’t great for our idea to long so as LITA traders we want to keep an eye on WTI oil prices and Exxon prices to drop. Once this happens it will be a great confirmation signal on the idea to re-assess if it’s worth going long. Until then add this to your watchlist and keep an eye on the indicators mentioned.
General Motors (GM) Stock Analysis
You’re probably wonder why the hell are you including a car company in the analysis? Well, interestingly enough 15% of imports from United States are cars! Which means including them will give us a good indication of exchange rate value. General motors is a major car manufacturer in the United States so we’re including it in the analysis.
What type of behaviour and correlations will GM have with USDNOK? Well, over the past 10 years of data there’s been a 42% positive correlation and something great has happened for our idea. General Motors has increased in value by 7.35% which equates to quite a strong long bias in our system.
Overall throughout the stock and commodity analysis we want to keep an eye on the following points:
Watch Exxon prices, fall in prices will be a great confirmation on our long bias on USDNOK
Watch WTI prices, again fall in prices will be a great indication of our long idea
Currently GM prices are in favour but see in the future how they progress for the most success
Interest Rate Differentials
The next economic indicator we’ve included in the analysis is the good old interest rate differentials. This is plotted in the blue line in the chart above with USDNOK in orange. What we understand from 20 years’ worth of data is that as the differential increases, USDNOK increases and when the differentials decrease the exchange rate tends to follow.
What we have in most recent data is the interest rate differential increase from a negative differential to now a positive differential. This is great for future USD strength as you’ll find out in the master class series. For example in the periods 2002 and 2009 the interest rate differentials troughed in a negative region after increasing value over the next few years. If the same follows suit now we may be in for a really big upwards trend!
S&P500(NOK) Stock Index Analysis
The final economic theme we’re going to be considering is the S&P500 priced in NOK, this gives us a good idea of current inflation and deflation and also what we should really be predicting in the future.
Currently the S&P500 is priced at 370 NOK whereas the most recent high was at 350 so it shows that US pensions and wealth is becoming worth more relative to Norway. This is where we’d look to have a long bias and buy USDNOK to protect against inflation in S&P500 assets. This is where we’ve given it a score of +4 due to the 5% increase in value.
This current indicator is great for our idea, all we’ll be waiting for now is the oil related assets to fall in value!
Commitment of Traders Report Analysis – COT REPORT ANALYSIS
The final stage of our analysis is now to make sure the market is with us and not against us. We do this by analysing the COT CHART which we’ve developed here at Logikfx. If you want to make it yourself we have a tutorial on this too here.
What we’ve identified is some really interest data. USD hedge fund sentiment has risen from a negative open interest to a positive open interest. This gives us confidence that our long idea for USDNOK could be ready as the market is agreeing with our position.
So to really time our idea now we’ll need to see if there are any predominant technical signs too.
USDNOK Technical Price Analysis
Regarding the price on USDNOK we’ve seen some interesting behaviour in the past year. More specifically you can see the during the major risk off environment in March when the COVID19 pandemic was announced USDNOK surged to all time highs. However, since then prices has continued to fall back to pre-covid levels.
This could be a great opportunity for a long due to the past high now being used as a potential support as outlined in the top green line. Now, between the green lines what we’re looking for are any price behaviour that may signal a reversal. These are things like bullish candles, bullish candle formations and things like morning stars.
Here we have the daily price data and I’ve just drawn a simple potential reversal pattern you could be looking out for in combination with oil prices.
Currently on our traffic light system we’re amber, we want to wait for the confirmation on oil prices and price to confirm buyers coming in. Once these signs start to show we can potentially move it to green and start deploying capital.
Hope you enjoyed the rundown of the analysis on USDNOK comment any currency pairs you’d like me to analyse and I’ll consider it!
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