These two currency pairs benefit from the oil rally

The Norwegian krone and the Canadian dollar have been the best performers among the G-10 currencies in recent weeks, thanks to their strong correlation with oil prices.

Against the Japanese yen – traditionally one of the currencies most affected by rising oil prices – NOK / JPY and CAD / JPY rose 5.6% and 5.1% respectively over the past month.

The Noki and Loonie have also outperformed all other major currencies since the start of the year and their relative strength may not yet be near an end, given analysts’ bullish short-term price forecasts. petrol.

Bank of America advanced the $ 100 / bbl call this winter amid strong demand pressure in the northern hemisphere, while Goldman raised its forecast to $ 90 / bbl by the end of the l year, as we recently discussed here.

Why CAD / JPY and NOK / JPY are strongly correlated with oil prices

International trade figures, such as trade deficits and surpluses, are an important factor shaping foreign exchange markets. While Norway and Canada are among the top net exporters of fuels in the world, the Japanese economy is heavily dependent on imported energy.

According to EIA statistics, Japan’s domestic energy consumption is nearly seven times greater than domestic production. For this reason, Japan ranks as the fourth largest importer of crude oil and the largest importer of liquefied natural gas (LNG) in the world.

On the other hand, Canada is the world’s fourth largest producer of oil and other liquids, as well as the third country in terms of proven oil reserves, while about 40% of Norway’s export earnings come from the sector. oil and natural gas, which contributes about 15% of the country’s GDP.

The correlation between NOK / JPY and CAD / JPY with Brent crude has always been strong, as shown below. When oil prices rise, the value of the Canadian dollar and Norwegian krone against the Japanese yen also increases, and vice versa.

More hawkish monetary stance has supported NOK and CAD

Soaring energy prices were not the only reason the loonie and noki have strengthened in recent months, as monetary policy divergences began to emerge between G-10 central banks and that forex investors are starting to see them as a differentiator.

The Norges Bank and the Bank of Canada are certainly on a different political path than the Bank of Japan (BoJ), which still remains marked by an ultra-dovish stance. At the last meeting in September, Norges Bank raised its benchmark interest rate to 0.25% for the first time after Covid, signaling 4 more hikes to 1.25% by the end of 2022.

Although interest rates remained unchanged at the last Bank of Canada meeting, a cut to its purchasing program of $ 2 billion per week is already on the board’s mind, with the possibility of seeing the first increase in mid-2022.

These monetary policy developments still look a long way off for the BoJ, which is still grappling with negative interest rates.

The bond market is a reliable thermometer of monetary policy divergences between central banks, as evidenced by the spread between the Norwegian and Japanese 10-year rate, which has returned to its highest level since 2019.

NOK / JPY Technical analysis

The Norwegian krone is currently hovering around 13.64 against the Japanese yen, up 25% from 52-week lows.

The 50-day moving average has just passed the 200-day moving average, forming what is known as the “golden cross” – a technical pattern indicating an uptrend.

The 14-day RSI [relative strength index] – a momentum indicator that tracks the speed of recent price movements – stands at 71 and has been floating in the overbought zone since October 11.

The greatest multi-year resistance is at the psychological level of 14.00, which corresponds to the highs of October 2018. A breakout of this level could increase the possibility of a move to the next resistance level, in area 14 , 30-14.40, around the highs of September 2017.

Profit-taking behavior or a sudden return of risk aversion sentiment could test the first support line at 1:30 p.m.

CAD / JPY technical analysis

The Canadian dollar is trading at 92.00 against the Japanese yen, thanks to a strong uptrend since the April 2020 lows.

Prices are 5% above the 50-day moving average and 18% above 52-week lows. The 50-day moving average recently saw a further rise and has been above the 200-day average for over a year.

The 14-day RSI recently moved out of overbought territory, which had held steady since the second week of October.

CAD / JPY has broken two major resistance levels at 91.13 (June 2021 highs) and 91.64 (September 2017 highs) and may consider the 93.15-93.25 area as the next level of resistance, which corresponds to the highs of November 2015.

The first support line is at 91.12 and a breakout of this level could increase the possibility of causing the pair to test the 50 day moving average levels.

Traders’ sentiment on NOK / JPY and CAD / JPY

According to the latest data from Capital.com, traders’ sentiment is bullish on NOK / JPY, with 100% of buyers, but bearish on CAD / JPY, with 72% of sellers.

Among the G-10 currencies, sentiment is slightly long on EUR / JPY, with 53% of buyers, while Capital.com traders are positioned net short on other crosses against the JPY.

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CFDs come with overnight costs to hold trades (unless you are using 1-1 leverage).

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