Implied volatility for the the Norwegian krone/euro currency pair jumped as the euro rose last week sparking a series of risk reversal trades. The Norwegian krone fell against the euro to NOK8.63 from NOK8.40 over the week, to hit a five year low against the single currency. One-week implied volatility jumped to 9.5% from 6.5%, and one-month implied volatility rose to 7.8% from 6.3% last week.
A foreign exchange derivatives trader said, "The most popular maturity instruments are between one week and three months. People are trying to get gamma on their books." Risk reversals were a common trade. The preference for euro calls pushed the risk reversal to 0.85 vol in favor of euro calls from 0.25% the previous week.
Rumors were rife as traders tried to understand what had triggered the move on the Norwegian krone. One said a combination of a large sterling/Norwegian krone spot trade and an unexpected interest rate cut on Dec. 17 unsettled the market and pushed up vol.
Over the last 12 months in Norway interest rates have fallen to 2.25% from 7% and analysts agreed that the krone will continue weakening, especially if the interest rates review on Jan. 28 brings another cut.Trevor Dinmore, a foreign exchange strategist at Deutsche Bank in London, said, "The Norwegian Prime Minister spoke on Wednesday, and didn't voice any concern over the fall of the krone. The market took this as a signal that the currency could weaken further."
EUR/NOK Spot & One-Month Implied Volatility
