G10 space: SEK and NOK shorts attractive, JPY & CHF longs relatively expensive – ING

In view of the Petr Krpata, Chief EMEA FX and IR Strategist at ING, in the G10 FX space, they see the most value in short SEK and NOK positions against USD (in line with the fundamental based conclusions above).

Key Quotes

“The Scandies tend to have the most negative risk adjusted returns in the G10 FX space (a desirable property when you are short). Importantly, the current levels of their volatility premia are not overly high and not far away from zero.” 

“To position for heightened EZ risk, we see short SEK and NOK positions as a somewhat better investment vehicle than being short EUR/USD as the latter: (a) offers lower risk adjusted return potential and (b) exerts higher volatility premium. This also fits our view that both SEK and NOK have ‘got ahead’ of themselves in terms of their recent gains, meaning that the scope for Scandinavian currency weakness is high should EZ risk hit the market.”

“What is also apparent from the Fig 4 is that the “obvious trades” such as short EUR/CHF and short EUR/JPY (which also offer non-negligible risk adjusted returns) are already expensive in relative terms, evident in the high volatility premia vis-à-vis their G10 peers.”

“While USD/JPY exerts non-existent volatile premium, its risk adjusted return potential (being long JPY against USD) is not the highest as both USD and JPY tend to benefit during periods of EZ risk. Short EUR/JPY offers meaningfully higher risk adjusted returns but as per above, this now comes at a price.”