FxWirePro: Brent adds impetus to NOK, CAD seems vulnerable on divergence between norges, FED and Bank of Canada – uphold outright trades
Source: FxWire Pro - Commodities / 16 Dec 2016 04:40:10 America/New_York
The combination of the OPEC deal and the prospect of cuts by non-OPEC producers was a better-than-expected outcome for oil and our commodity strategists stay bullish, looking for Brent to reach $60/bbl in December 2017.
Within G10, NOK stands out as an attractive candidate as it still appears cheap relative to rate differentials and oil prices (refer above chart).
Moreover, the central bank is expected to hold policy steady as growth appears to have bottomed and the balance of payments dynamic remains supportive. Admittedly inflation missed expectations this past week, but we continue to think that growth matters more for the Norges Bank, the outlook for which is better with higher oil prices.
On the other hand, CAD stands out as a candidate to short as it will be vulnerable if a hard line on trade emerges from the US (particularly around NAFTA). Hardly any concession is priced into CAD for any such political risk and Canada’s external position remains vulnerable with current account and basic balances both in deficit territory.
Moreover, in the latest meeting, the BoC continued to be focused on disappointing business investments and nonenergy goods exports, while also hinting at a period of diverging monetary policy between the US and Canada (Bank of Canada remains on hold as widely expected).
The combination of virtually no political risk priced in to CAD, combined with cheap NOK valuations had prompted us to initiate long NOK vs. CAD. The trade also had a soft exposure to long oil prices pre-OPEC.
We further increase our long oil exposure via NOK, recommending the longs vs. EUR. Increase long exposure to oil; buy NOK vs. EUR outright to prior long NOK vs. CAD.
Hence, the outright trades read this way,
Stay short in EURNOK via vanilla option structures, 2m ATM delta put options at spot reference 9.0530.
Short CADNOK at 6.4938 with a stop at 6.5725. Marked at -1.55%.© FxWire Pro 2020. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.