The NOK is closely correlated to crude oil prices, and it has strengthened this year following stabilization in oil and the Norwegian economy. Norway is also running the highest inflation readings among G10 economies.

The combination of a better growth outlook with above-target inflation has nudged Norwegian monetary policy to a less easy setting.

Option strategy:

We have a structurally bullish view on Norwegian krone which is predicated on several drivers, not only just improved crude oil prices: improving growth momentum, a central bank that is turning less dovish, fiscal policy that continues to be simulative, real policy rates that are the most negative in G10, all coupled with still-cheap valuations.

All these factors leave us structurally bullish on NOK which we are positioned for outright via short USDNOK outright.

This week the central bank confirmed that it will keep rates on hold. The key sentence from the Norges Bank’s statement is that ‘overall developments since September do not differ substantially from the projections in the September MPR’.

This was a relief for NOK as it indicates that the central bank is not over-reacting to the decline in inflation (core is 0.35% lower than the NB had expected). The key risk for NOK will now be the OPEC meetings and the currency has underperformed this week amid lower oil prices.

While we could get some headlines pertaining to the OPEC deal over the weekend, the meeting on November 30th would ultimately be more imperative.

The base case is still for a deal to be reached and we stay constructive on oil price’s consolidation pattern. 

We encourage shorts in USDNOK cash trades at spot reference 8.2437, marked at -0.67%.

Alternatively, those who intend to hedge the downside risks of this pair, we recommend 1m -0.49 ATM delta put options, ATM options are far more sensitive since higher IV greatly increases their chances of expiring ITM. ATM options are more expensive than OTM options, but cheaper than ITM options. Please have glance on 2w ATM IVs of this pair, it’s crawling below 8%.

They have the highest Gamma, Vega, and Theta which means their premium is the most sensitive to moves in either direction.