In FX Top Trades 2017: How to position for the coming year , we recommended positioning for a lower EUR/NOK but highlighted short-term temporary headwinds for the NOK. Specifically, we recommended buying a 6M 8.8000-9.2500 put spread financed by selling a 2M 9.1000 straddle.
Since inception, the position has benefited from a fall in short-end EUR/NOK implied volatility, which is now borderline cheap, according to our Volatility Valuation Model. At the same time, spot is slightly higher compared with the entry level at 9.0190, following EUR/NOK rising sharply this morning on the back of the lower-than-expected Norwegian inflation figures. The P&L for the entire structure is currently positive, with a gain of 0.82% (indicative prices, spot ref.: 9.0782).
Fundamentally, we still expect NOK to perform well in 2017, supported by valuation, economic growth and real rates, and we continue to see potential for EUR/NOK spot breaking below 9.00 on a more sustained basis (see Danske Bank FX Trading Portfolio: Sell EUR/NOK 12M forward outright , 4 January). Thus, we have decided to take advantage of the increase in spot and decline in implied volatility and close the short-dated sold put for an indicative price of 735 pips (spot ref.: 9.0782) .
We remain positioned for a lower EUR/NOK by leaving open both our bought put spread (expiry 31 May 2017) and sold call (expiry 31 January 2017).
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