EURNOK having limited potentiality

The reaction in the interest rate market proves that Norges Bank was quite dovish in their comments, but EURNOK never managed to climb above the high from the previous week at 8.87 (now an important level). Implied volatilities fell during the day; this combination should imply that the market isn't very long NOK. There is no panic to observe like the one seen in December last year. Looking at the flows this also looks quite familiar, speculative accounts have not been heavy buyers of NOK.

Expectations of lower money market rates and a dovish central bank limits the downside in EURNOK. However, the high levels, low positioning, ECB's QE and Norway's NOK-purchases should argue for a limited upside as well, says Nordea Bank.

According to Nordea Bank, "ECB doing QE for 7% of European GDP while Norway is buying NOK for 6% of its GDP should be NOK-positive. The government could also increase spending if it sees the weak economy as critical (not yet the case). Some would probably also see the levels in EURNOK as attractive for a short position".

Long term these conditions should also be consistent with some downside in EURNOK, which is also our forecast. Short term however there is reason to believe that the potential is limited. First of all the liquidity in the money market is increasing and with it we will see lower Nibor fixings, quite often also consistent with weaker NOK. A fast appreciating NOK would also motivate Norges Bank to cut more and faster. Their own forecast for NOK is for a slow appreciation.

"So range bound should be the new trend in EURNOK, perhaps with a small tilt for the downside. Implied volatilities still reflects high uncertainty so there should be value in being short vol. As an illustration one could sell 6m strangles with strikes at 8.45 and 9.10 for 22bf (spot 8.75). In other words losses will start to appear if EURNOK goes higher than 9.32 or lower than 8.23", suggests Nordea bank.