FX Market Update: Buy One-Week USD/NOK 5.78 Call Ahead Of Norges Bank

Looking at the signals from our short-term financial models, there are no significant misalignments this week and we do not see any stretched levels according to the technical indicators. Implied volatility continues to look relatively cheap and is currently seen trading at multi-year low levels in most currency pairs despite the recent rise in front-end volatilities.

However, in our view several things make USD/NOK stand out this week. First, USD/NOK volatility appears most attractive according to the simple volatility score model shown in the table above. Second, NOK versus either EUR or USD is currently seen trading with the biggest deviations from our short-term model estimates. Third, the latest flow data from Norges Bank shows that foreign banks, which we see as a proxy for speculative money, added another NOK7bn to new long NOK positions and it seems the market has become a bit stretched long NOK. Finally, some other banks are calling for a very high daily purchase of foreign currency from Norges Bank in November. We do not share this fear but it underlines that short term we could see some upside pressure on EUR/NOK and USD/NOK.

Trade idea: buy 1W USD/NOK call option ahead of Norges Bank meeting

We suggest buying an one-week USD/NOK 5.74 call option to position for a move higher in USD/NOK. The option costs an up-front premium of 150 NOK pips corresponding to 0.26% of notional (indicative, spot ref.: 5.74) and covers two very important events, namely the interest rate meeting in Norges Bank and the publication of the daily purchase of foreign currency from Norges Bank in November (both due on October 31), which potentially can move USD/NOK significantly and hence cause front-end volatility to rise: Finally, works the strategy also as hedge against a move lower in EUR/USD due to the high correlation between USD/NOK and EUR/USD.