 Norway's krone on improvement track, benefits from crude oil
by Kevin Pendley
I've got crude oil on the brain. But I'm not alone. Basically every asset market in the world keeps looking over their shoulder to see what's going on with the price of "black gold." The most powerful economy on the planet now shudders audibly when crude oil prices rally. You know things have gotten out of whack when the people who sell crude oil are trying to talk down prices!
I realize last week's FX column also focused on crude oil, but we've seen dramatic swings in crude oil prices lately, and it's still timely to think about potential trading opportunities based on the outlook for crude oil. What's more, as I write this column we are one day away from the U.S. monthly employment report, and if we get a strange number on the jobs data it could completely wipe out any short-term price elements that involve any major worldwide currency pairs against the greenback (i.e., the biggies such as euro/dollar and dollar/yen).
This week saw OPEC President Chakib Khelil come out and say that oil prices were not just abnormally high, but that prices could tumble to $80 dollars a barrel over time if the anemic U.S. dollar would just rally and if tensions in the Middle East would just subside. I'm all for the dollar going bonkers on the upside, but peace in the Middle East? Well, one out of two ain't bad. But back to Khelil's statement: crude oil prices could go to $80 dollars? At the time, crude was around $124, so you're talking about a 35% decline in prices for a product you make money producing. I don't know about you, but if I sell widgets for a living, it's unlikely I'd try to talk down prices on widgets when I'm already selling pretty much all the widgets I can make.
Khelil, however, is concerned about the hot new phrase in energy markets: "demand destruction." There is a new theory making the rounds that outlandishly high energy prices are making the world change. Pretty soon, people may carpool!
The interesting thing about the whole energy price debate is that opinions are all over the map. Some of the best and brightest (and best paid) research minds on the planet are still projecting crude oil prices at the end of the year closer to $150 dollars a barrel than $100 dollars. So, where do I stand on the crude oil price conundrum? I think that crude oil prices have topped for some time, and that a pullback toward $110 dollars a barrel wouldn't be a surprise. While I would dearly love for crude oil to eventually sink back below $80 dollars, I'm leery of that happening. Last time I checked, more than a billion people in China alone were upgrading their standard of living. They need cars. They need heated homes in the winter. They need energy. Crude oil gyrating in the $100 to $150 zone makes sense (I can't believe I just typed that - I really hate crude oil prices at these levels). We've already seen that stock markets get nauseous above $135, which means the U.S. dollar gets seasick there too. If you think crude oil is going above $135 again soon, then it's an easy trade - sell the dollar, sell U.S. equities, collect money. I still like dollar longs here against the euro, so I'm not eager to put myself in that camp, but there is a currency with improving fundamentals that stands to benefit from high crude oil prices, even if those prices are at the low end of the aforementioned range.
That currency is the Norwegian krone. Now, I've traveled all over the world, but I've never been to Norway. I'm sure it's a nice, frozen place. I hear about it once every four years or so when they hold the winter Olympics and some Norwegian skier, or ice skater, or winter marksman floats across my TV screen for a few seconds. Didn't Norway have that famous bikini team? Oh wait, that was their more famous neighbor, Sweden.
Norway has all of 4.6 million people, which ranks it #117 in the world, right behind Turkmenistan and Eritrea. Really, it's smaller than "Eritrea?" Oh well, Norway may not have many people, but they do have plenty of energy resources. In fact, Norway is the third-largest oil exporter on the planet, generating some 3 million barrels a day. What's more, little ole Norway is also the sixth-largest producer of natural gas, and controls huge gas reserves in the North Sea. They even hold some of the world's largest coal reserves as well. The end result is that Norway stands to benefit greatly on capital inflows whether crude oil is at $150 or $80.
Norway's benchmark interest rates are at 5.75%, while the ECB rate is at 4.25%, which generates a positive carry on the trade as well, providing a minor cushion on price action. From a chart perspective, there is a key reversal on daily charts at the recent highs and weekly charts are top-heavy as well, slipping under trendline resistance that dates back to 2006. The nice thing about the chart picture is that risk is well defined from a short-term perspective at 8.0844 and at 8.1500 for long-term investors. I would be remiss not to note that powerhouse investment banking firm Goldman Sachs earlier this week instituted a sell recommendation on euro/krone, and immediately caught a big downdraft in the cross. Goldman's currency research work is probably the best on the planet, and riding their coattails is usually a good idea.
Updating our current trade recommendations, our short euro/dollar trade and short euro/sterling trades from last week turned into attractive winning positions and I opted to book profits on Wednesday's close to avoid event risk from the GDP, weekly claims and big monthly employment report. I remain upbeat about the dollar, and will look to re-enter euro shorts next week, or when the signals look right. For those of you still holding euro shorts with a nice profit - congrats!
FX COLUMN TRADE CONCEPT RECAP
DATE CONCEPT PRICE THEN/NOW PROFIT/LOSS COMMENT
4/24/08 Short euro/dollar entered @ 1.5682 +0.52% stopped out at 1.5600
5/01/08 Short euro/yen entered @ 161.50 +0.12% stopped out at 161.30
5/08/08 Short euro/Canada entered @ 1.5680 +1.46% profit taken @ 1.5450
5/15/08 Short euro/yen entered @ 162.40 -0.36% stopped out at 163.01
5/29/08 Short euro/dollar entered @ 1.5525 -0.55% stopped out at 1.5610
6/10/08 Short euro/dollar entered @ 1.5682 +0.99% stopped out @ 1.5610
6/19/08 Short Aussie/dollar entered @ 0.9600 -0.49% stopped out @ 0.9670
7/03/08 Short euro/dollar entered @ 1.5750 -0.64% stopped out @ 1.5851
7/18/08 Short euro/dollar entered @ 1.5885 +1.94% profit taken @ 1.5576
7/18/08 Short euro/sterling entered @ 0.7920 +0.78% profit taken @ 0.7858
7/31/08 Short euro/krone enter @ 8.0400 n/a
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