USDNOK Long as NOK Frontrunning Comes to an End: Q4 Top Trades

USDNOK Talking Points:

• Norges Bank rate hike fully price in
• Possibility of Fed become more hawkish as inflation continues to rise

Norges Bank was the first central bank in a developed economy to hike interest rates in the current cycle. At its Sept. meeting, the Norwegian bank’s monetary policy committee concluded that the economy of Norway had normalised enough to start reducing monetary support, despite pandemic concerns.

USD/NOK Weekly Chart

Source: IG

Traders of the Norwegian Krone had already been positioning themselves for a 25 basis point hike, hinted at previously. The pullback in USD/NOK coinciding with the Sept. meeting was limited as some frontrunning had already taken place, with the pair coming off the 9-month high in August.

With the latest FOMC meeting hinting at the possible start of asset tapering in November, it may be time for the US Dollar to regain ground against the Krone. That said, a Norges Bank statement hinted at another possible rate hike in December, so the direction in USD/NOK is going to be largely dependent on Fed moves in the next few months, given that the Norwegian central bank has laid its cards on the table.

My top trade is centred around a long position in USD/NOK with expectations that the Federal Reserve steps up its tapering agenda. Global risks and the ongoing pandemic could keep the Dollar supported, whilst the Krone doesn’t seem to have many rally-inducing events that haven’t already been priced in. Of course, there could be surprise developments, such as a hike from Norges Bank in November rather than December. A surprise move would likely see a wider pullback in USD/NOK, possibly targeting a drop below 8.20. A stronger dollar would face resistance at the 100 SMA on the weekly chart, which may be converging along the 9.00 mark as the quarter unfolds.

— Written by Daniela Sabin Hathorn, Market Analyst Follow Daniela on Twitter @HathornSabin