FX Quant Strategy provides a quantitative overview of the currency market, including several valuation tools and monitors, focusing on the FX options market.
This week we recommend two FX option trades.
Sell 1M EUR/SEK straddle.
Enter 3M (NYSE:MMM) bullish USD/SEK seagull.
According to our models, implied volatility trades in expensive territory in most of the Scandi crosses - in particular, NOK volatility currently looks expensive following the past week's price action. Two months ago we recommended selling 3M USD/NOK 7.60-7.95 risk reversal based on 'expensive' signals for both spot and skew (see Introducing Danske Bank's FX Quant Strategy , 5 March). While the 3M USD/NOK risk reversal is still expensive, spot is no longer overvalued according to our models. Hence, we favour staying sidelined in USD/NOK ahead of the interest rate meeting at Norges Bank on 7 May.
SEK volatility has increased following the Riksbank meeting on 29 April. In particular, 1M EUR/SEK volatility looks expensive according to our models. Fundamentally, we believe spot will range trade in the coming month, on the back of ECB and Riksbank monetary policy, and we recommend selling 1M straddle.
According to our short-term financial models, the biggest misalignment in spot is currently seen in USD/SEK, which trades three standard deviations below the model's estimate of 8.6006 (pages 3 and 8). We recommend positioning for a rebound in the cross via a bullish 3M seagull, which benefits from the relatively expensive implied volatility.
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