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:
Sell 3M (NYSE:MMM) GBP/USD risk reversal
25 delta GBP/USD risk reversals on maturities above the 1M tenor have bounced substantially over the past weeks with the 3M 25 delta risk reversal now trading around the level seen before 7 February 2015 (just before the 3 months maturity including the election day). According to our models, the 3M now trades in neutral territory (albeit still negative). We think the 3M risk reversal has increased too much given the uncertainty surrounding the UK election on 7 May and we prefer to position for a possible GBP sell-off after the election day by selling a 3M GBP/USD risk reversal.
According to our models, implied volatility trades in expensive territory in most of the Scandi crosses, especially the front-end of the volatility curves (up to the 1M tenor). The short 2W EUR/SEK 9.27 straddle that we recommended in the previous Danske Bank's FX Quant Strategy on 8 April expired yesterday with a total profit of 0.77% (see page 2). While the range trade monitor (page 12) still suggests selling 2W and 1M EUR/SEK straddles, we prefer to stay on the sidelines in Scandi volatility market ahead of the monetary policy meetings at the Riksbank on 29 April and Norges Bank on 7 May.
To Read the Entire Report Please Click on the pdf File Below