The spring sell-off in NOK has been reversed, but NOK bulls need further evidence of improving fundamentals before taking action. We see the continued recovery of the Norwegian economy and base effects lifting inflation next 6 months as favorable while expecting temporary headwinds for EUR strength.

Should expectations for monetary policy normalization in EMU or Sweden continue to grow, NOK rates should move in tandem, limiting the negative drag on NOK. Oil should start providing NOK support towards the end of the year. We foresee EURNOK at 9.20 in 3 months and 8.80 in 12 months.

Hold EUR and SEK calls vs USD, stay short EUR/Scandi cross-rate correlations Scandinavian economies continue to do little wrong and early stage cyclical lift in Norway and a powerful mid-cycle boom in Sweden should enable NOK and SEK to keep pace with even a resurgent EUR.

Data this week supported the theme (the second consecutive above consensus CPI print in Norway and a 3.3% annualized gain in 2Q IP in Sweden) and while we have taken profits on a cash position in USDNOK, we remain comfortable expressing a constructive view on Scandinavia through these option trades that embed a short position in the correlation between the EURUSD trend and the EUR/Scandi crosses.

The Swedish trade has lagged Norway but SEK has its once-per month opportunity to perform next month with the August CPI print.

The upward trajectory in inflation creates a favorable positive asymmetry in SEK – at worst we believe SEK should perform in line with EUR whereas there is maybe a 25% chance that it can outperform by 2-3% if inflation finally delivers a reality check to the central bank.

Long a 2m 1.1850 EURUSD call financed by shorting a 2m 9.47 EURNOK call.

Long a 2m 7.8750 USDSEK put financed by shorting a 2m 9.5925 EURSEK call.