Sell 3M EUR/SEK Straddle, Buy 1M GBP/USD Straddle

By Danske MarketsCurrenciesNov 01, 2015 04:36AM ET

www.investing.com/analysis/sell-3m-eur-sek-straddle,-buy-1m-gbp-usd-straddle-269840

Sell 3M EUR/SEK Straddle, Buy 1M GBP/USD Straddle

By Danske Markets | Nov 01, 2015 04:36AM ET

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EUR/USD

0.00%

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GBP/USD

-0.14%

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EUR/GBP

+0.12%

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EUR/NOK

-0.17%

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EUR/SEK

-0.13%

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NOK/SEK

+0.46%

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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 3M EUR/SEK straddle skewed on the downside.

- Buy 1M GBP/USD ATM straddle.

According to our spot monitor, EUR/NOK remains significantly overvalued, while NOK/SEK is oversold. Fundamentally, we remain medium- to long-term bullish on the NOK and we still like gradually to build up long NOK/SEK positions via risk reversals as suggested in FX Quant Strategy: Short EUR/GBP via 3M seagull, long NOK/SEK via 6M risk reversal , 14 October.

The correlation between EUR/USD and EUR/GBP has increased substantially over the past few weeks resulting in a stabilisation in GBP/USD. This has led to a substantial decline in implied volatility. Indeed, implied volatility in the G10 space has in general traded lower over the past week but 1M implied GBP/USD volatility is currently the only outright 'cheap' signal according to our model. While we expect both the Fed and Bank of England (BoE) to hike interest rates in Q1 16 - and thus expect GBP and USD to continue to move mostly in tandem in the coming months - we think the current low volatility levels offer an attractive risk/reward and not least a cheap hedge of divergent Fed versus BoE views or UK versus US data surprises in the coming month. Hence, we recommend buying 1M ATM GBP/USD straddle, which covers the upcoming BoE meeting on 5 November, the UK and US labour market reports on 5 and 11 November, respectively, and, finally, October's CPI prints for both countries as well.

This weeks Riksbank meeting, in our view, confirmed that 9.30-9.60 remains a fair range to play for EUR/SEK in the next few months, as the cross remains caught between the ECB on the one side and the Riksbank's aversion to rapid SEK appreciation on the other. Thus, we recommend selling 3M EUR/SEK straddle, which from a risk/reward perspective is very attractive. The Riksbank lowered its KIX forecast near term ,which is a signal that it is willing to 'tolerate' a stronger krona in the near term compared with before. Therefore, we recommend skewing the straddle on the downside with a strike at 9.35 (spot ref.: 9.37).

To Read the Entire Report Please Click on the pdf File Below

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Central Banks

Interest Rates

Next Meeting

FED

4.50%

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ECB

2.65%

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BOE

4.50%

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SNB

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Sell 3M EUR/SEK Straddle, Buy 1M GBP/USD Straddle

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