From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The US 10-year yield has made a decisive move back above 1.40% in recent sessions.
We’ve been pounding the table about this critical level for months now--and for a good reason. It’s a vital component of the global growth narrative and rotation into cyclicals.
And most investors probably aren’t prepared for it!
Yesterday, JC and Steve discussed areas that demand attention in a rising rate environment and how we should position ourselves. You can check it out here.
Think cyclical and value stocks. And don’t forget economically sensitive commodities like energy and base metals.
But what about currency markets?
For starters, most currencies versus the US dollar should be beneficiaries of rising rates. This is particularly true for commodity-centric currencies like the Australian dollar, the Canadian dollar, the Russian ruble, and the South African rand.
With the US dollar Index $DXY still pressing on the upper bounds of its year-to-date range, let’s check out some other currencies that are offering trading opportunities in this new rising rate environment.
This week, we'll look at the Norwegian krone versus its neighbor, the Swedish krona NOK/SEK.
Below is a chart of the NOK/SEK cross overlaid with the US 10-year yield $TNX, accompanied by a 63-day correlation study in the lower pane.
As you can see just by looking at the price charts, these two have a positive relationship.
But when we apply a 63-day correlation study, we get some interesting information.
Notice how the correlation decoupled as rates rose and peaked earlier in the year. This also coincided with a correction for many risk assets.
Fast-forward to today, and we have a very different picture.
The correlation between the NOK/SEK and the TNX is increasing instead of decreasing. The new development signals that both rates and the assets that benefit most from a rising rate environment are moving higher in tandem.
And here’s a closer look at the price chart:
Two things:
First, from a trading perspective, we want to look for a break above 1.0265 in the NOK/SEK for an opportunity to get long.
If it’s above those former April highs and the key 61.8% retracement level, we want to be buyers with a target near 1.1345.
Second, if rates continue to rise with cyclical stocks and commodities, the NOK/SEK chart is likely heading up and to the right.
On the other hand, risk assets, especially those tied to energy, might not be doing so well if and when we see signs of weakness in this cross. But, for now, higher is looking like the more probable outcome.
As usual, regardless of whether we decide to trade this forex pair or not, there is valuable information here.
The currency market is confirming the recent move higher in rates.
Could this change as the USD continues to challenge its year-to-date highs?
Absolutely. And although we see similar strength and resilience from other risk-on pairs, most still have lots of work to do.
Forex markets remain mixed, patterns continue to fail, and we do not see many resolutions just yet.
But we do like the idea of betting on higher rates, and we think NOK/SEK could be a great way to express that thesis.
We hope you enjoyed this post!
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Currency Report below!
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