FX Strategy - Danske Bank

Investment Research

17 October 2017

FX Strategy Buy bullish EUR/NOK ratioed seagull

Buy EUR/NOK bullish seagull Strikes:

9.2000-9.3800-9.6000



Balance of risk favours a position for a higher EUR/NOK going into year-end.

Ratio

1:1:2



Enter 9.20-9.38-9.60 bullish 1:1:2 ratioed seagull, cost neutral (indicative prices).

Expiry

29 December 2017



Position also benefits from short-term range trade, lower implied volatility.

Entry level:

9.3230 (spot)

Costs:

Neutral (indicative prices)

Hard stop loss:

N/A

We have for some time expressed a wish to enter a bullish EUR/NOK seagull as a way to position for a weaker NOK as we approach year-end (see Reading the Markets Norway, 2 October). This fundamental predisposition is based on a reduced NOK potential via relative rates (Norges Bank and Nibor technicals), speculative positioning being borderline stretched long, a bearish oil price view and a turn in the Chinese business cycle, which we think is an overlooked NOK driver, see chart 3 (see China outlook – Moderate slowdown and CNY stabilisation, 13 October). In addition, the NOK has historically had a tendency to weaken in November and not least December, as risk appetite tends to soften, liquidity worsens and as Norges Bank (daily NOK buyer) in reaction to this temporarily leaves the market. Despite this fundamental predisposition, we have been waiting for better entry levels, as USD/NOK hedging activity around 8.00 alongside the lack of a clear catalyst have kept EUR/NOK in check in the 9.25-9.40 range. Meanwhile, over the past week EUR/NOK has returned to the lower end of the range on the back of NOK/SEK buying, as Swedish inflation fell short of expectations. Paradoxically, the NOK move higher has coincided with disappointing Norwegian macro data (e.g. retail sales, manufacturing data, inflation, housing market) and the revelation of a 2018 budget proposal that was slightly less expansionary than most investors had pencilled in (see table).

Chart 1. We pencil in a rebound in EUR/NOK going into year-end

Source: Macrobond Financial data, Danske Bank

Chart 2. NOK tends to weaken 1% in December on year-end, worsening liquidity

With the improved entry level, we now recommend entering a 9.2000-9.3800-9.6000 bullish EUR/NOK seagull at a 1:1:2 ratio, expiry 29 December, cost neutral (indicative prices, spot ref. 9.3230) with B/E at maturity of 9.20 and 9.82 (chart 5). We do not have a strong volatility model signal but emphasise that the position is implicitly hedged via the historical correlation between spot and volatility. In that regard, we think EUR/NOK is likely to continue range trading in the very near term and as such this trade does not go against our recommendation to sell a 2W NOK/SEK straddle from Reading the Markets Norway, 16 October. If EUR/NOK in the very near term continues to trade sideways, it would likely coincide with volatility falling, which would benefit the position. Chart 4. Norwegian data have been disappointing recently

Chart 5: PnL chart for ratioed EUR/NOK seagull PnL, %

4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00

Ratioed seagull

Spot ref

9.00 9.04 9.08 9.12 9.16 9.20 9.24 9.28 9.32 9.36 9.40 9.44 9.48 9.52 9.56 9.60 9.64 9.68 9.72 9.76 9.80 9.84 9.88 9.92 9.96

Chart 3. Forthcoming turn in Chinese cycle to prove a NOK headwind


EUR/NOK at Maturity


Senior Analyst associated with particularly Source: Macrobond Financial data, Danske Bank


Important disclosures and certifications are contained from page 4 of this report.

Kristoffer Kjær Lomholt +45 45 25 85 29 [email protected] @Lomholt10

www.danskeresearch.com

FX Strategy

Table 1. Reading the Markets Norway - Open strategies and trades with recent status change

Type

Trade

Idea

Target & P/L

FX

Sell a 2W NOK/SEK straddle

Utilise kink on volatility curve to play central banks on hold and thin data calendar.

Fixed income

Sell NST479 (17 February 2017) and buy NST475 (24 May 2023) vs German equivalent DBR 10Y (15 August 2027) and DBR 5y (15 May 2023)

Long end steepening relative to international peers on improved growth outlook

Money Market

Receive NOK IRS 1y/1y and pay EUR IRS 1y/1y

Short term hedge to our long-term positive growth case due to potential strong reactions to weak housing data and low September inflation

Money Market

Buy NOK FRA 3m DEC17 and sell NOK FRA 3m DEC18 vs sell EUR FRA 3m DEC17 and buy EUR FRA 3m DEC18

Relative FRA flattening vs Eure: Short term hedge to our long-term positive growth case due to potential strong reactions to weak housing data and low September inflation

Money Market

Pay NOK IRS 5y/5y and receive EUR IRS 5y/5y

Higher rates on faster economic recovery and increased inflationary pressure

Money Market

FRA 'fly': Buy NOK FRA 3m DEC17 and NOK FRA 3m DEC19 and sell NOK FRA 3m DEC18

Norges Bank will reiterate its interest rate path and the market will move in the direction of Norges Bank's guiding

FX

Sell 3M NOK/SEK straddle skewed to upside

Play modest NOK/SEK rebound and subsequent range via options

Opened Entry Target/stop Now P/L Opened Start Target/stop Now P/L Opened Entry Target/stop Now P/L Opened Start Target/stop Now P/L Opened Entry Target/stop Now P/L Opened Start Target/stop Now P/L Opened Entry Target/stop Closed P/L

Status 16.okt.17 1.028 "N.A." -

New

16.okt.17 -25 -5/-40 -25 0 02.okt.17 130 100/145 132 -2 02.okt.17 11 0/17.5 12 -1 14.sep.17 81 100/70 88 7 04.sep.17 -7 -20/0 -7 0 21.aug.17 1.02 "N.A." 1.01 %

New

Indications generally based on mid-market prices some hours ahead of the publishing of the report. Source: Danske Bank

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Hold

Hold

Hold

Hold

Hold

FX Strategy

Table 2. Most recently closed strategies in Reading the Markets Norway Money Market

Buy NOK FRA 3m DEC17 and sell NOK FRA 3m DEC18

Tighter cash liquidity and higher US libor vs OIS spread

Fixed income

Reduced NST479

spread

The end of the long end gov bond outperformace and normalisation of int NOK issuances after a period of low volumes

Money Market

Receive NOK IRS 1y/1y and pay EUR IRS 1y/1y

Disinflationary pressure from housing market slowdown and low inflation (vs hawkish foreign central banks)

FX

Sell 6M EUR/NOK risk reversal

Strategic bet on stronger NOK.

Money Market

Receive NOK IRS 5y/5y and pay SEK IRS 5y/5y

Low Norwegian inflation ahead

Money Market

Sell NOK FRA 3m JUN 2018 and buy NOK FRA 3m JUN 2019

Norges Bank may remove the downside to the target rate projection in the MPR 2/17

Money Market

Sell NOK FRA 3m DEC 2017 and buy NOK FRA 3m DEC 2018

Improved macro conditions and exaggerated relative focus on liquidity shortage end 2017

Money Market

Sell NOK FRA 3M DEC 2017 and buy NOK FRA 3M DEC 2019

Change in inflation target not unlikely

Money Market

Sell NOK FRA 3M MAR 2018 and buy NOK FRA 3M DEC 2018.

International 'reflation' suggests a steeper short-end Norwegian interest rate curve

asset

swap

Opened Start Target/stop Now P/L Opened Start Target/stop Now P/L Opened Start Target/stop Now P/L Opened Spot Entry Target/stop Closed P/L Opened Start Target/stop Now P/L Opened Start Target/stop Closed P/L Opened Start Target/stop Closed P/L Opened Start Target/stop Closed P/L Opened Start Target/stop Closed P/L

21.aug.17 18 5/25 14.5 3.5 06.jun.17 -32 -20/-38 -32 0 03.jul.17 125 100/140 124.5 0.5 03.jul.17 0 "N/A" 9.2921 1.70 % 30.mar.17 34 5/45 33 1 19.jun.17 22 35/13 28 6 03.mai.17 15 30/7 21 6 13.mar.17 50 75/35 35 -15 06.feb.17 15 35/0 18 3

Indications generally based on mid-market prices some hours ahead of the publishing of the report. Source: Danske Bank

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Take profit

Closed 26.sep

Closed

Take profit 17 July

Closed

Take profit

Take profit

Stop

Take profit

FX Strategy

Disclosures This research report has been prepared by Danske Bank A/S (‘Danske Bank’). The author of this research report is Kristoffer Kjær Lomholt, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. Danske Bank’s research reports are prepared in accordance with the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments are organised independently from, and do not report to, other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication.

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Disclaimer related to distribution in the United States This research report was created by Danske Bank A/S and is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank A/A, pursuant to SEC Rule 15a-6 and related

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FX Strategy

interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to ‘U.S. institutional investors’ as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to ‘U.S. institutional investors’. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-U.S. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.

Report completed: 17 October 2017, 10:20 CEST Report first disseminated: 17 October 2017, 11:25 CEST

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