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The global macro backdrop for FX would likely stay unstable for at least the next several months, through the first hundred days of the incoming Trump administration.
The markets latched onto a Trump policy narrative that primarily focused on the reflationary aspects of the president-elect's campaign rhetoric, but downplayed many other potential aspects of the new administration’s broader platform. Markets may be currently in the process of a substantial reassessment of Trump's approach towards economic policy following a disappointing first press conference in which he passed on the opportunity to comment on tax cuts, infrastructure spending, or deregulation (the core pillars of the 'Trumpflation' market narrative).
Subsequently, we advise longs in NOK vs EUR and CAD We continue to recommend NOK longs as an outright play on stronger oil prices and the ongoing improvement in the outlook for NOK rates (EURNOK) as well as an oil-neutral hedge to potential trade conflict under the incoming Trump Administration (CADNOK).
NOK is the second strongest performer among G10 space since December 16 (up 2.2% versus USD) yet it has plenty of headroom still to rally as it remains markedly undervalued relative to cyclical drivers. Fair-value for EURNOK currently stands at 8.72; the resultant 3% undervaluation of NOK is amongst the more extreme of the last five years (this is a 1-sigma gap – refer above chart).
In addition, NOK TWI is 1.7% lower than the Norges Bank projects for Q1; hence there’s no suggestion the currency is close to levels that could start to undermine the interest rate outlook.
CAD is the one G10 currency not to have succumbed to US-exceptionalism since the presidential election –the currency has appreciated by a net 1.2% and only RUB and COP globally have done better. The performance of CAD is surprising not because it is unwarranted by fundamentals (the modest deterioration in rate spreads vs USD have been slightly offset by the rally in crude), rather that it ignores the risk of any protectionist fall-out to Canada.
This strikes us as unreasonable seeing as the US takes three-quarters of Canada's exports and the manner in which Trump has already demonstrated a willingness to co-opt individual companies to restrict their NAFTA activities (even if these companies have been singled out for their Mexican, not Canadian, production plans).
Stay short in EURNOK at 8.9805 December 9 with a stop at 9.2050. Marked at -0.21%.
Stay short CADNOK at 6.35 November 22 with a stop at 6.5725. Marked at-1.50%.
