I posted two more from Bank of America / Merrill Lynch a little earlier:

  1. NZD/JPY long

  2. Long EUR/GBP

The bank says that given high uncertainty on US policies and very low FX volatility, we prefer relative value trades or trades that are not affected much by the US, before we get more clarity this fall.

#3 is Short CHF/NOK

  • CHF/NOK is the most expensive cross in G10 according to our equilibrium estimates.
  • Short CHF/NOK would therefore be our top relative value trade at this point.
  • Divergence of monetary policies should be negative for CHF/NOK. As the ECB prepares markets for QE tapering, the pressure on the Norges Bank to keep its monetary policy stance loose will weaken. While rate hikes are still hard to envisage, especially given recent inflation patterns, Norges Bank can gradually remove their easing bias as the economy improves.
  • Norges Bank pushback on the currency is also not a concern now, given current weak NOK levels, with the central bank noting that the currency has been weaker than expected.
  • At the same time, we expect the SNB to stay on hold and let diverging monetary policies weaken the overvalued CHF.
    The risk to this trade is political instability in Italy, but we do not expect elections this year and in any case changes in the election law should help avoid tail risks scenarios. From the NOK side, oil price developments are a key source of uncertainty. Any disappointment from OPEC that sees oil sell-off would weaken NOK.