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We are emphasizing a RV trade in this write-up on the reaction functions of the Scandinavian central banks earlier in the week (Riksbank dogmatism vs Norges Bank pragmatism) and augment the long NOKSEK spot position with an option trade following the news that the finance ministry has lowered the Norges Bank's inflation target from 2.5% to 2.0%. This announcement which will help to reinforce the market's confidence in an earlier policy pivot in Norway.
If bought NOKSEK in spot intra-week; add in option form prior to the change in Norges Bank’s monetary policy mandate on Friday, we highlight that:
a) NOK is cheap relative to oil prices as well as rate differentials,
b) That macro conditions were increasingly favorable of the currency with activity data on average printing better than expected, especially in comparison with other European currencies such as SEK and NOK. In addition, there was already a growing risk that the Norges Bank could deliver a rate hike sooner than in 1Q’19 as it had indicated previously. Against this already-constructive backdrop, a lower inflation target further strengthens the case for a reversion in NOK cheap valuations.
The pricing in of an earlier rate hike, which is not yet factored by markets, should be additionally NOK-positive with expectations of higher interest rates, in combination with NOK being a lower inflation currency on average (although the benefits of the latter are admittedly partially offset by prospects of lower growth on margin as well).
We bought NOKSEK in cash intra-week and augment this today in options, specifically we buy a 3-month NOKSEK 1.066/1.092 call spread vs selling an EURSEK 9.95 put for 20bp. The latter trade expresses the view that NOKSEK will move higher in the near-term while EURSEK stays elevated amid the lack of Swedish policy catalysts to mean revert.
We advocate stopping NOKSEK cash trades at current levels and prefer below-stated options trade alternatively.
Buy a 3-mo NOKSEK 1.066/1.092 call spread vs EURSEK 9.95 put for a net 20bp. (Spot ref: 1.0585 and 10.1955).
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