Talking Points:

• Broad Trading Range That Has Yet to Be Broken
• Notable Divergence from MACD Indicator
• Fundamentals That Support NOK Strength

Since peaking above 6.22 in November, USDNOK has since established a broader trading range between 6.05 and 6.22, which has not been broken, even with significant policy news coming from the most recent Federal Open Market Committee (FOMC) meeting, where the central bank formally announced tapering of asset purchases.

Judging by the inability of the US dollar (USD) to take out the November highs against the Norwegian krone (NOK), it appears that tapering expectations were already priced in.

See recent: Too Much of a Good Thing for USD/NOK

Now, with the ‘’big’’ tapering news behind us, we still do have higher lows since the USDNOK bottom in September, although the pair has failed to make a higher high. In my humble opinion, we should ride out the ongoing fight between 6.05 and 6.22 in order to determine the prevailing direction for early 2014.

Guest Commentary: Range Trading Prevails in USD/NOK

Support: 6.05, 5.97-5.95, 5.90-5.87

Resistance: 6.22-6.25, 6.30, 6.50

After pricing in expectations for tapering by the Federal Reserve, the dollar posted strong gains against the krone in November, and USDNOK peaked right around the 6.22 level. Since then, the price action has been confined between 6.05 and 6.22.

It bears noting, however, that we see a negative divergence between price and the Moving Average Convergence/Divergence (MACD) indicator, which favors more consolidation or even a deeper pullback in USDNOK in upcoming weeks.

Even with higher lows, USDNOK failed to make a higher high since the bottom in September. The current landscape looks a bit unclear as well, which means that initiating positions in either direction involves higher-than-normal risk.

Furthermore, we do not have any clear short-term technical patterns that support a turning point for either bulls or bears. For that reason especially, I find it best to ride out the current trading range or wait for a better technical set-up before initiating any new positions in USDNOK.

Fundamental Factors in Play for USD/NOK

The Norwegian krone (NOK) has been weak throughout the fourth quarter of 2013, and this could boost Norway’s export industry in the year ahead. This NOK weakness is being caused by slow Norwegian economic growth, which is being driven by weaker growth in the oil industry, as well as in general construction and consumer spending.

Given the slowdown in oil investment, stronger export growth and more breathing room for the Norges Bank should keep the nation’s economy going and maybe even surprise to the upside. The new government, lead by Prime Minister Erna Solberg, supports the easing of bank credit policies in the year ahead, which should support a stronger housing market and general investments.

Furthermore, a stronger NOK may prevail in early 2014 because the currency is now weaker than the fundamentals in the Norwegian economy. It’s very possible that these oversold conditions have simply been caused by low liquidity in the market, and particularly in USDNOK, around the holidays.

Trade Idea for USD/NOK

Sometimes the best trade is no trade at all, and in the current conditions, it is best to be outside the market and simply observe USDNOK. Enter only when a favorable set-up emerges that provides the desired risk/reward profile.

I am currently looking for a reversal pattern in either direction in order to resolve the broad trading range that’s been established between 6.05 and 6.22. A ‘’perfect’’ set-up could be a washout of either longs or shorts in USDNOK, but for now, it is too difficult to see what the next tradable move will be for this pair.

In the meantime, while we wait it out, I wish all the readers at DailyFX.com a Happy New Year!

By Rafiul Hossain, Guest Analyst, DailyFX.com