FX Market Update
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FX Market Update
Tue, Nov 4 2008, 17:28 GMT
by Danske Research Team
- • The past week's best performers were the currencies of commodity exporting countries. Against USD, CAD rose by nearly 7%, which despite the increase in oil seems slightly overdone from the perspective of our short-term financial models.
- • Turning to AUD/USD, which rose by around 4% during the past week, the recovery in world equities has been an important driver. Nevertheless, the current level of the spot is significantly above the model's estimate, perhaps indicating that the recent move is due to an improvement in risk appetite rather than changes in the underlying financial drivers.
- • In the last edition of FX Market Update, USD/JPY marked one of the largest deviations between the spot and our short-term financial model. However, USD/JPY has since strengthened, thereby closing the gap to the model estimate.
- • Due to the relief rally in risky assets, the fall in implied volatilities comes as no surprise. Implied volatility in USD/CAD has increased since last week but has fallen in recent days. Nevertheless, implied volatility remains high by historical standards, which translates into wide confidence regions for most currency pairs. In some pairs, the confidence regions are particularly skewed, reflecting extreme risk reversals. For example, in USD/JPY the option market prices a 90% probability of the spot trading within the interval [76.64; 109.82] on a 3-month horizon and [61.01; 112.86] on a 1-year horizon.
- • One way of taking advantage of high implied volatilities, while avoiding the unbounded downside risk of a short strangle or straddle, would be through no-touch, or European digital options. For example, these strategies could be implemented in EUR/GBP which has been trading in a range since March this year.
Published on Tue, Nov 4 2008, 17:41 GMT
Archive
- Recent moves in EUR/USD and EUR/CHF are out of sync with our short-term models
Published On Wed, Nov 26 2008, 16:42 GMT - FX Market Update
Published On Tue, Nov 18 2008, 13:46 GMT - FX Market Update
Published On Tue, Nov 4 2008, 17:28 GMT - FX Market Update
Published On Tue, Oct 28 2008, 15:59 GMT - FX Market Update
Published On Wed, Oct 15 2008, 16:36 GMT
Danske Bank
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