The structural case for SEK appreciation remains intact the real effective exchange rate is 10-11% below its long-term average despite an economy that has a positive output gap and which continues to deliver above-trend growth. This week it was reported that Q4’16 GDP jumped by 4.2%. In addition, we upgraded our forecast for Q1’17 from 3.0% to 4.0% (the Riksbank expects 3.2%).

The problem for SEK is not the economy but rather monetary policy which is still myopically fixated on delivering at-target core inflation. A central plank of the central bank’s strategy is too impede a fundamentally justified appreciation in SEK for as long as it can, which is why we expect only a relatively slow pace of SEK appreciation. In order to better reflect the outlook for a slow grind higher in SEK, we are converting our cash short in EURSEK into a covered put.

This serves to improve our entry level by around 0.5% and provides some positive time decay as SEK is prone to consolidate in the four weeks between the only data point that matters for Riksbank, CPI.

EURSEK vols like all euro pairs are elevated as result of the French election premium so there’s added value in selling lower strikes in EURSEK at this juncture. 3m implied vol of 6.65% compares to realized vol of only 4.9%.

Hence, sell a put against existing cash short in EURSEK. Stay short NZDSEK in options.

Sell a 2m2w EURSEK put, strike 9.4529. Receive 0.52%. Spot reference 9.4620. Sold EURSEK at 9.4847 on January 13. Stop at 9.5680.