Scandis risk a deeper setback with a high probability of NOK underperformance.

While risk markets remain fairly resilient we clearly see the bigger down-risks for NOK which is perfectly reflected in the failure of NOK/SEK to break above the key-T-junction at 1.0172 (int. 38.2 %).

In terms of EUR/NOK, we now see good chances of challenging the countertrend rally target at 9.6100/9.6275 (int. 76.4 %/left shoulder) where the formation of a right shoulder within a broader H & S topping pattern would provide a good risk-reward selling opportunity.

Similarly, USD/NOK could bounce to 8.7515 (int. 76.4 %) provided 8.6226 (minor 76.4 %) is taken out.

Lower oil prices have weighed on the NOK, but data has been positive. When volatility eases, we expect appetite for the NOK to pick up again, helped by steadily higher oil prices. We still believe the NOK is undervalued.

Foreign banks sold off NOK positions in late June ahead of Brexit referendum and after Norges Bank. NOK positions were added the week after Brexit but have since been scaled back.

Recommendations: We recommend hedging short term NOK payables via risk reversal strategies and long-term payables through FX forwards.

Simultaneously, it is also advisable to hedge NOK receivables using FX knock-in forwards.

In conjunction to that, we also recommended buying a 2w EUR/SEK ATM put option financed by shorting a 1M EUR/SEK 9.70-9.30 strangle.