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 one FX option trade :
- Enter bullish 3M EUR/NOK seagull
Implied FX volatility has generally traded lower during the past weeks and the 0-3M segment in Scandis and Majors generally trades in 'cheapish' territory. In particular implied EUR/USD volatility in the 1 to 3 month segment is cheap according to our volatility valuation model. While this would normally indicate a buying opportunity, we think pricing is fair as it reflects market expectations that EUR/USD is likely to remain moderately under pressure ahead of the FOMC meeting on 14 December. Currently, interest rate derivatives markets price in a roughly 70% probability of a 2016 Fed rate hike.
Looking at our FX spot monitor , we currently observe some very stretched signals on the SEK-crosses following the recent plummeting of the krona, and the SEK looks very oversold versus EUR, USD and NOK. During the recent rally, EUR/SEK has broken above important resistance levels and the SEK is trading in uncharted territory. Our models are usually very sensitive to regime shifts and for that reason, we warn that our models on SEK-crosses should be taken with a pinch of salt at the moment.Short-term, we expect EUR/SEK to trade in a volatile and choppy fashion probably going into the next Riksbank meeting on 21 December. For that reason we prefer to stay on the sidelines in SEK for now but look for opportunities to sell EUR/SEK.
EUR/NOK trades in oversold territory according to the FX spot monitor. Fundamentally, we expect EUR/NOK to trade higher in the coming months, among other things driven by seasonality and worsening liquidity which usually is a positive for EUR/NOK in the last part of the year, see chart on slide 3. We recommend positioning for a period of EUR/NOK upside via a 3M bullish seagull. The structure can be entered at zero cost by buying 3M 9.0500 EUR/NOK call and selling 3M 9.2000 call and 3M 8.9400 put (indicative prices, spot ref.: 9.0200).
To read the entire report Please click on the pdf File Below