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 USD/JPY 117 straddle
- Buy 3M 9.11/8.85 EUR/NOK put spread
Looking at our FX spot monitor we do not observe any strong misalignments among the Scandiand major crosses, while our short-term financial model suggests that USD/JPY is currently overbought despite the past days' correction lower. Among the EM crosses, in particular EUR/TRY stands out as being significantly overbought both technically and according to our short-term financial model.
Implied FX volatility has declined substantially since the beginning of the New Year with the exception of USD/JPY, EUR/GBP and GBP/USD. The 0-1M tenors in the G10 sphere still trade in 'cheapish' territory according to our Volatility Valuation monitor with the exception of implied USD/JPY which is outright expensive at the 1-12M tenors, according to our model. At the 3M tenor especially implied volatility on NOK crosses stands out as looking cheap.
Fundamentally, we remain bullish on USD/JPY as we still expect the yen to suffer in a scenario with rising longer dated global yields and higher global inflation. However, as the market's pricing of 'reflation' has probably become a little stretched, we expect USD/JPY to stabilisein the 115.50-117.50 range near term and we thus recommend exploiting the high implied USD/JPY volatility by selling 1M 117 USD/JPY straddle. We prefer to skew the straddle to the upside relative to spot and forward as we still see risks skewed to the upside for the cross.
EUR/NOK moved sharply higher yesterday after the lower than expected Norwegian inflation figures and the continued decline in the oil price. While our short-term financial model suggests that the move higher in spot can be justified given the development in the oil price, vixvolatility and relative interest rates, we remain bullish on NOK and still expect the cross to break below 9.00 supported by valuation, economic growth and real rates. We are short EUR/NOK 12M forward outright in our FX Trading Portfolio (see Danske Bank FX Trading Portfolio: Sell EUR/NOK 12M forward outright , 4 January) and short EUR/NOK via options as one of our FX Top Trades for 2017. Hence, we see the recent move higher as an opportunity to add to short EUR/NOK positions and given the low implied volatility, we recommend buying 3M EUR/NOK put spread.
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