Citibank believes the Norwegian kroner has upside potential against the euro and is pitching an options strategy to take advantage of the view.
In the trade clients buy a one-month kroner call/euro put struck at NOK8.03 and sell a three-month kroner put struck at NOK8.30, according to Leon Armstrong, foreign exchange engineer in London. At the same time the client sells the euro against the Norwegian kroner in the cash market.
Investors win if the kroner strengthens above NOK8.03. The trade was designed Tuesday when spot was NOK8.05. Armstrong chose NOK8.30 as the strike on the put because it is close to the kroner's year-to-date low of NOK8.33. Armstrong believes the kroner is unlikely to fall this far, but this strike still generates enough premium to subsidize the trade.
Steven Saywell, foreign exchange strategist at Citibank in London, said the Norwegian government is attempting to stimulate the economy before the September elections, and this likely will boost the kroner. In addition Norges Bank, the central bank, changed its emphasis to inflation rather than exchange-rate management earlier this year. Citibank predicts inflation of 3% and therefore expects the central bank to keep rates on hold. Privatization of the energy industry and high oil prices will also aid the currency's appreciation against the euro.
