Will The NOK Rally Continue?

Only 3 months ago, I started a long term bet against the Swedish Krona, especially against USD. By that time, the USD/SEK was trading at 6.5000 and had a good rally up to 6.9300.

I closed all my long positions in USD/SEK because I was hoping for a wider pullback but for some reasons the market refuses to provide it. I am monitoring closely this pair as I am looking for a new lower entry level. If you draw a Fibonacci, connecting the beginning of the rally with the peak, the pullback I am expecting to see is for the rate action to go at least to the 23.6% Fibonacci level in the 6.7650 - 6.7850 area but an optimal pullback would be for the USD/SEK to fall until the 38.2% Fibonacci level in the 6.7000 area.



Eight days ago, the Norwegian MoM CPI release was showing that the CPI rose to a seasonally adjusted 0.7% from -0.2% in the previous month while the analyst expected to see it at 0.0%. This reading sparked the speculation that the Norges Bank might raise the official rate from 1.5% sooner than the market previous expected. The rate action in USD/NOK is supporting this speculation as the currency pair had a wider pullback than it's cousin USD/SEK had. As you can see on the chart below, USD/NOK retraced to the 38.2% Fibonacci level, being also supported by an ascending trend line in that area.




I totally disagree with the idea of a Norwegian rate hike and in my opinion, the current NOK rally is unfounded. Can the Norway raise the official rate while ECB is promoting European QE and Sweden is struggling with high unemployment and deflationary risks? One day after the Norway CPI was released, Sweden showed the YoY CPI at 0.0% from 0.2% previous reading and 0.1% analysts expectation. In June 2014, Norway central bank Governor Oeystein Olsen was signaling the willingness to tolerate more weakness in the Krone as offshore energy investment abates and record household debt weighs on consumers.

At the beginning of August, a key survey by Norway's statistics agency showed that oil companies investment in the nation dropping by as much as 21% in 2015 as the industry grapples with higher costs. At the beginning of August, the Brent Crude Oil was trading above 106$ while now it has a strong bearish bias and trading under 102$. I don't know for how long will last this Oil prices war but most likely will affect the next Norway CPI reading as the Norwegian Oil Companies balance.

Although the domestic picture (with the YoY CPI at 2.6% - above central bank's target 2.5%) might support the idea of a rate hike, for me is hard to believe that the Norges Bank can afford to do it if you look at what's happening in the neighborhood: ECB plans QE, Sweden could cut the interest rate further to record low levels or to implement some sort of easing measures themselves, SNB is struggling with a strong CHF and sooner than the market expects might need to intervene in the FX market to defend the EUR/CHF 1.2000 threshold and BoE is stubbornly refusing to signal the raise of the official rate. How can the Norway be the only European nation to afford to stay out of this "easing" game?

I think the current NOK strength is nothing else than a good opportunity to start buying the dips in USD/NOK. Although the 38.2% Fibonacci level is offering a good dip to buy, I think there are good chances to see USD/NOK at the 50% Fibonacci, where also is supported by the 200 SMA. Anyway, I will start building long positions from the current levels targeting 6.600.