FxWirePro: Delta-hedgers to be mindful of NOK valuations and USD/NOK – EUR/USD risk-reversals

NOK valuations are still cheap with the currency still substantially lagging oil (refer 1st chart). The latest decoupling with oil has come amid deterioration in risk sentiment which we have been flagging as a risk for both Scandi currencies given that they have among the highest beta in G10 to equities.

US Treasury yields moved up modestly yesterday after new data provided further confirmation of buoyant US economic growth. However, the US dollar slipped against both the euro and sterling. Given today’s light data calendar markets are likely to look further ahead. This weekend’s G7 summit is coming into focus and markets will be looking for further indications on the state of global trade relations. 

For active delta-hedgers, the current tightness of the USDNOK – EURUSD risk-reversal spread sets up good entry levels into a convex RV (refer 2nd chart) that has a solid track record of performing through the EU debt crisis years even when EURUSD was the epicenter of the crisis.

Ostensibly, the relative illiquidity/more frequent jumps in NOK contribute to higher delivered vols than in the more liquid EUR, which is why such spread trades are better installed in shorter, gamma heavy expiries than in longer ones. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -28 levels (mildly bearish), while hourly USD spot index was at 12 (neutral) while articulating at 07:04 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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