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/CHF straddle
Buy 1M EUR/GBP risk reversal
In the Scandi FX sphere, implied SEK volatility generally trades at elevated levels. According to our models, in particular USD/SEK volatility on maturities up to the 1M tenor looks expensive, while the long end of EUR/SEK (12M tenor) also offers attractive value. Short-dated EUR/SEK volatility has dropped in recent weeks and no longer trades in 'expensive' territory according to our models. In FX Quant Strategy 5 May we recommended to sell a 1M EUR/SEK straddle.
Among major currencies, our models suggest that EUR/CHF, USD/CHF and USD/CAD volatility are expensive, while the range trade monitor (page 12) favours selling EUR/CZK straddles with a 2-week and 1M maturity. We recommend to sell 1M EUR/CHF straddle. Our short-term financial models indicate that EUR/CHF is currently slightly overvalued and we therefore prefer to skew the strike to the downside.
Our option skew monitor indicates that NOK/SEK and EUR/GBP 25-delta risk reversals trade in cheap territory. Given the very oversold spot signal for EUR/GBP, we recommend to position for a possible bounce in EUR/GBP by buying 1M 0.7050 / 0.7250 risk reversal. Fundamentally, we expect the cross to trade lower on a 3-6M horizon. However, the combination of a stretched skew and spot valuations, in our view, offers an attractive risk/reward in the short term.
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