In the days that followed the Brexit referendum, the Eurodollar plunged against the Norwegian Krona. The EURNOK pair hit a low of 9.14292 but recovered to 9.35109 in the last week of August. However, mixed economic data from the Eurozone once again pulled the EURNOK pair below 9.20.
It should be noted that the economy of Norway and that of the countries in the Eurozone is struggling to recover. While most of the issues faced by the Eurozone are a direct spill-over of the 2008 credit crisis, Norway faces the brunt of cheap oil. Thus, for the past six months, the EURNOK pair remains range-bound between 9.20 and 9.37. For the reasons described below, we anticipate the EURNOK pair to rise once again to a level of 9.37 in the nearby future.
The Norwegian economy faces a peculiar problem – rising unemployment and inflation. If the Central bank raises the current benchmark rate of 0.5%, then it would further weaken the ailing economy. On the other hand, if the Norges bank (Norwegian Central Bank) cuts the benchmark rate, then the inflation will rise further.
The country’s dependence on the revenue from the export of crude oil is the main reason for such a problem. Norway needs at least $70 per barrel to break even. However, it now seems to be an unlikely dream. The country continues to fill the fiscal deficit gap using the $800 billion reserve (rainy day) fund.
With oil hovering around $50 per barrel, the country is depleting the reserves fast. The collapse in the price of oil has resulted in a loss of about 36,000 jobs in the past two years. It is certainly not a small number considering the fact that Norway’s population is just about 5.1 million.
The Eurozone, on the other hand, faces a large list of problems. However, the region’s common currency is gaining strength because the ECB (European Central Bank) finds it hard to source the debt instruments for the bond-purchase program that began last year. At the August meeting, the ECB’s President Mario Draghi also kept the region’s benchmark interest rate on hold.
Draghi also stated that the interest rate would continue to remain at the current low level of 0% for as much time as needed. However, to fuel growth, the analysts believe that the ECB has to contemplate further monetary easing. Till then, fundamentally, the Euro would gain ground against other currencies including the Norwegian Krona.
The currency pair has firm support at 9.21. Resistance for the EURNOK pair exists at 9.37. The stochastic is rising out of the bearish zone. Thus, we expect the EURNOK pair to move up and reach the level of 9.37.
To benefit from the range-bound movement, a currency trader should take a long position in the EURNOK pair. The long position can be opened near 9.21. The profit can be taken when the pair reaches the upper price band of 9.37. A stop-loss order can be placed below 9.16 to reduce the risk.
A one-touch call option can be traded through a binary broker to benefit from the EURNOK pair’s uptrend. The contract should have a strike price of not greater than 9.37 or lower. The trader should also go for a contract with a validity of at least one month.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
