Market players rushed to the options market last week to purchase puts on the euro against the Norwegian krone, after the Scandinavian currency took a tumble in the spot market on Thursday, following a jump higher on Wednesday. The fall in krone came as a surprise to traders because it had been jumping in line with oil prices. The currency pair was trading around NOK8.20 as DW went to press last Thursday, having dropped to NOK8.16 last Wednesday from NOK8.23 the previous Wednesday. In spite of the move in the spot market, one-month implied volatility increased to just 6.14%, up from 6.05% on the previous week.
Traders reported particular demand for one- and two-month euro put options, but said the currency pair was well-bid across the curve. Players were buying options with strikes at NOK8.10, NOK8.00 and NOK7.95, according to traders. "Oil prices were spooking people out," said a trader at a German bank. The krone also jumped higher against the U.S. dollar at the start of the week, reaching NOK6.60, but one trader explained the pair is not as liquid as euro/krone so option buyers took views on the single currency against the krone instead.
Hans Redeker, currency strategist at BNP Paribas in London, suggested implied volatility may still be low because the market is waiting to see whether the Norges Bank makes any statement on the strength of the krone in its meeting on Wednesday. Redeker noted the bank's target inflation rate is 2.5%, but inflation in Norway is around 1% so the bank may move to weaken its currency.