Several central banks have been visibly misplaced their inflation targets for months in times of zero interest rates - to the downside that is. The only central bank that manages to miss it on the other side is Norges Bank. And very clearly so, to be accepting an inflation rate of 3.7% (June) despite an inflation target of 2.5% takes some courage.

Norges Bank left its deposit rate unchanged at the current record low of 0.5 pct on June 23rd, as widely expected, saying the economy is likely to remain weak in the coming period, even though the upswing in oil prices may reduce uncertainty and push up demand. The bank also repeated it could reduce the cost of borrowing to negative levels if the economy was exposed to new major shocks.

 We would objectify that the history illustrates that central banks are quite successful in the fight of high inflation and that it is, therefore, less worrying if the central bank misses its target at that end rather than inflation being too low. Yes, maybe, but only if monetary policy is restrictive.

And Norges Bank is a long way off that. The rate of inflation has been rising since mid-2015 and was consistently above Norges Bank’s inflation target this year, while Norges Bank maintains its expansionary monetary policy. At its meeting three weeks ago it sounded concerned about future growth and stated that “there are still prospects that the key policy rate may be reduced in the course of the year”.

However, it has turned out that hoping for a stronger krone to put pressure on the inflation rate medium term does not work either, as EURNOK has been trading above 9.20 since the autumn of 2015. There is a possibility that the depreciation of the krone that started in June of last year, will start to fall out of annual inflation rates.

Hence, only a material recovery in oil prices from here onwards is likely to stop those cutting rates to new historic lows.

While this risk overhangs, we maintain a negative stance on the currency, with EUR/NOK expected to retest the recent highs around 9.55-60 by the Q3 end (currently we aren't far away from this target).

The long futures position is also used as we wish to mitigate (buy) the underlying outrights of spot FX in EURNOK that he will require sometime in the future.

Should the underlying asset price EURNOK price rise, the gain in the value of the long futures position will be able to offset the increase in purchasing costs.