FOREX OPTIONS 4 minutes to read

Owning optionality in EURNOK over key event risks

John Hardy

Head of FX Strategy

Summary:  Is NOK ready to break out of range?


Next week we have a possibly pivotal FOMC meeting on Wednesday and a Norges Bank meeting the following day, with the former critical for all asset classes and currencies while the latter could see NOK finally breaking out of its tight range.

It’s impossible to know whether the Federal Reserve is willing to deliver on expectations for a rate cut next week – few are expecting a cut but given the expectations for a number of cuts by year end, some dovish forward guidance is expected at a minimum. If the Fed manages to deliver a very clear easing message, this could prove very supportive of risk sentiment, commodities and smaller currencies that often correlate with risk appetite.

Next Thursday the Norges Bank meets and  is expected to hike rates and  provide its latest guidance on where it sees the policy rate in the years to come. With Norwegian rates falling recently in line with global rates, the market is perhaps expecting a slight lowering of the path. Norges Bank could surprise either way, but may be eyeing the 10.00 level in EURNOK and we think that it would want to avoid sending the NOK even weaker from there(the 10.00 level has been the approximate historic top,  even over the global financial crisis).

As well, Norway’s CPI is not as low as the levels seen elsewhere and there is no urgency to change the message.

In this light, owning some optionality in a pair like EURNOK – where NOK potentially stands to gain on the Norges Bank decision if guidance is sufficiently hawkish, or at least non-dovish and the bank delivers the expected rate hike. But NOK could also get some extra support if the Fed manages to surprise on the dovish side and supports risk sentiment and commodity prices via a weaker USD.

There are no certainties either way, and EURNOK is bottled up in a range so we would prefer to express a view through the options market.

Trade for EURNOK downside next week (with spot trading 9.774 on June 14): Long EURNOK 9.725 put, expiry June 26, cost 0.0252, so breakeven right around 9.700

Traders or hedgers of existing NOK long exposure believing that the Fed is not at all ready to deliver on market expectations and that risk sentiment could stumble badly if they don’t and that Norges Bank may also wax cautious could look to do the opposite and buy a EURNOK call for the same date, strike 9.825 (costs a few pips more than the put).

Note: Traders with a longer-term time horizon may look to stretch the strike prices a bit further and take the expiry to a few days to the far side of the June 28-29 G20 meeting, which could see developments in the US-China relationship (i.e., a Xi-Trump meeting and its outcome.) that rock markets either positively or negatively.

Chart: EURNOK

EURNOK has been bottled up in a tight range lately and may make a break if market volatility picks up in the wake of the FOMC meeting.
Source: Saxo Bank
Risks: 

All of the premium risked can be lost in an options trade.

Norges Bank may be more cautious than expected in its outlook and the Fed may not deliver as much as expected, which could lead NOK to trade to the weak side instead. Alternatively, EURNOK could simply remain rangebound for now.
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)