FX Market Update provides a quantitative overview of the currency market, including several valuation tools and monitors.
Looking at the signals from our short-term financial models, AUD continues to look overvalued with AUD/NZD, AUD/USD and AUD/CAD trading 2.3, 1.6 and 1.6 standard deviations above model estimate, respectively. In the FX option market, 1M implied volatility generally looks expensive when evaluated by a Z-score of differences between implied and realised volatility. In particular, Scandies, NZD and GBP volatility looks expensive with Z-scores above 1. For maturities up to 3M, the largest Z-score is seen for NOK/SEK with the 3M implied realised volatility spread trading 2.4 standard deviations above the historical average.
Although NOK/SEK currently does not look mispriced according to our short-term financial models, we expect fundamentals (i.e. relative monetary policy) to drive up the spot level in the coming months and consequently we find it attractive to position for a higher spot level. Specifically, we recommend utilizing that 3M NOK/SEK implied volatility looks expensive by entering a 3M ratioed Seagull.
The strategy can be entered cost-neutral (indicative prices, spot ref. 1.1065) through a 3M bought call option with strike 1.1065, a sold 3M call option with strike 1.1400 and a sold 3M put option with strike 1.0840 for a double notional. The strategy is profitable if NOK/SEK at maturity trades above 1.1065, with profits capped at a spot level of 1.1400. The strategy incurs a loss if NOK/SEK trades below 1.0840 at maturity. Noteworthy the strategy is net long time-value (theta), thereby profiting from unchanged spot levels up until maturity.
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