USD/NOK upside looks limited based on oil forecasts – MUFG

The reflation trade was seen through the prism of oil on Monday with Brent crude oil jumping 5.5% which impacted G10 FX with both the Norwegian krone and the Canadian dollar being the top performing currencies. As the global demand backdrop is quite supportive of oil prices, NOK and CAD are set to outperform.

Oil jump is understandable from perhaps oversold levels

“The risk-off USD rally last week on fears of another COVID-19 disruption, while valid, was from a global oil demand picture that was quite promising. Demand had risen and even with the Delta variant in Q3, we estimate overall demand at 98.5mn b/d. The pre-COVID run rate is still set to be hit in Q1 2022. Technically, the price fall also looked overdone with the RSI dropping below the 30.0-level.”

“While the sharp oil rally may well now be done, sharp declines from here also appear unlikely which will help provide NOK and CAD with support. Both are also supported by more proactive central banks. The BoC is tapering and high inflation data last week will likely keep them on course.”

“If Fed Chair Powell was to signal continued caution on Fed tapering, NOK could see further outperformance over the short-term.”