USD/NOK rally likely nearing an end, but much depends on oil wars
The USD is at its highest levels against NOK since March 2002 – a not unsurprising development given the divergence in fortunes in the US and Norwegian economies since mid-2014. However, that bull run is quite possibly closer to its end than its beginning.
The big driver for NOK is of course the oil price, which started falling from around mid-2014 and has so far notched up losses of around 75%. Currently, Brent crude is around $33/bbl, recovering from a low of $27/bbl. Some forecasts suggest it could go as low as $15/bbl while others are clustered around $20-25/bbl.
The problem is that there is far too much oil coming onto the markets – up to 2 million barrels a day according to the Saudis with supply exceeding demand by 1% according to experts – and it’s those marginal barrels, which set the global price. However, Saudi is intransigent about cutting supply in its determination to shut down US shale producers and now Iran is going to be pumping more oil and Iraq has similar plans. For currencies such as NOK this would be a dire outcome if world markets continue to be swamped with oil year after year with prices heading even lower.
The fact is that oil is not only below the cost of production for many producers – though certainly not all i.e. Saudi & Russia it could be around $5-15/bbl – it is certainly well below the ‘social’ costs of production for most petro-states. That means income from oil is no longer enough to support the societies and economies of countries, such as Venezuela, Saudi Arabia and Russia. Norway, at least has the benefit of its $800 billion national pension fund. Its income contributes up to 10% of the Norwegian government’s expenditure, but even with that buffer it is feeling the pressure.
At some point, probably this year, oil producers are going to have to sit down and agree to cut back production for the sake of their own survival, even though they’re at loggerheads at the moment. The most intransigent producer, Saudi Arabia, which relies on oil for over 70% of its revenues, ran up a budget deficit equivalent to 16% of GDP last year, is fighting proxy wars in the Middle East, simply can’t afford such low oil prices for long. Over the medium- to long-term, Saudi and Russia have the biggest incentive to stabilise prices among the big producers.
Social costs are often pegged at anything over $80/bbl for petro-states. In reality, many of the producers have some scope to lower that via cuts in expenditure, raising taxes, privatisations etc .. Also, markets, which fall fast tend to rebound fast and a number of forecasts suggest oil could recover to $40-50/bbl by the end of the year, no doubt driven by an eventual agreement to limit supply – though price rises are likely to be capped by shale producers, which can restart production quickly when prices reach economic levels – possibly around $50-60/bbl.
In the short-term, USD/NOK could still reach 10.00 and maybe even slightly beyond. Once USD/NOK peaks it could fall back to levels of 7.00. Apart from oil prices, much also depends on the US Federal Reserve and whether it can raise rates four more times this year. Given the global turmoil that appears unlikely, in which case the USD’s rise could be arrested.
TECHNICAL ANALYSIS: USD/NOK pullback appears temporary
Last week, USD/NOK actually ceded ground falling from a high of 8.9600 to 8.6262, a level not seen since mid-December. This of course reflected the rebound in oil prices after being heavily over-sold.
Further downwards progress for USD/NOK would rely on clearing tough support around 8.6200 and then 8.6090-95. Resistance is clustered around 8.6865,.8.7061 with 8.9605 being the ultimate target as it was the previous multi-year high.
If USD/NOK goes back into rally mode it is likely to clear 10.00 and possibly even reach 12.00. Much depends on what happens in the oil market. In the meantime, the daily MACD still has a sell signal on USD/NOK, suggesting some possible further downside for the pair with 8.6200 likely to provide tough support and possible a bottoming out level.
From the perspective of the dailies, the bull run for USD/NOK does still look alive. The current pull-back is likely to be temporary. Indeed, there is precedence. From the end of Sept 2015 to mid-October, the pair saw quite a sharp pull-back from 8.6020 to 8.0360 with the rally resuming towards late October until it stalled again around January 10-11.
By Justin Pugsley, Markets Analyst, MahiFX