FX Market Update Sell 3M EUR/CHF straddle; enter 3M EUR/TRY risk reversal

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1 Investment Research 10 September 20 FX Market Update Sell 3M EUR/CHF straddle; enter 3M EUR/TRY risk reversal What stands out Implied volatility has in general corrected lower over the past couple of weeks. However, when evaluated by a Z-score of historical spreads between implied and realised volatility (see page 7), front-end volatilities in general still look expensive, while implied volatility on longer dated maturities looks cheap. Following a period of sharp sell-offs in emerging market (EM) and some commodity currencies, volatilities in the EM sphere remain elevated. Thus, implied volatility in EUR/TRY and USD/TRY trade around the highest levels seen in at least a year but stretched levels are also seen particularly in the front end of the curve in, e.g., EUR/PLN, EUR/HUF and EUR/CZK. Carry trade strategies have been under pressure recently and despite increases in EM interest rates, carry-to-risk looks less favourable due to the rise in volatility. Our open carry basket (long MXN, HUF and TRY versus short USD) lost more than 3% in August, while our G10 carry basket (page ) lost around 1% over the same period. Trade idea #1: sell 3M (skewed) EUR/CHF straddle Front-end volatilities in general look expensive and our range-trading monitor (page 10) suggests selling 3M EUR/CHF straddle. Given the geopolitical situation, we prefer to be short EUR/CHF volatility where the SNB-imposed 1.20 floor protects against an escalation of the conflict in Syria. We already have an open recommendation to sell 3M EUR/CH F1.22 put and buy call (half of the notional on the sold put) at zero cost see FX Trends: Trust your central banker (20 August) for details. We still see potential for an increase in EUR/CHF in the near term and expect the 1.20 EUR/CHF floor imposed by the Swiss National Bank to remain intact in the coming months. Hence, as an alternative to the 3M/ strategy, we think a skewed straddle also looks attractive. Specifically, we suggest selling a 3M (skewed) EUR/CHF straddle for an upfront premium of 265 CHF pips corresponding to 2. of notional (indicative prices, spot ref: ). This strategy benefits from the positive option skew (see page 11) and is profitable as long as EUR/CHF trades within the range of at maturity (10 December). Trade idea #2: Enter 3M EUR/TRY risk reversal TRY has been one of the worst-performing currencies over the past month, when fears of a hard Chinese landing and not least the conflict in Syria have weighed not only on TRY but on EM currencies in general. One way to position for a near-term improvement in risk sentiment and a possible correction higher could be via a EUR/TRY risk reversal, which utilises the high level in volatility (page 7), a positive carry (page ) and an attractive option skew (page 11). Contents Spot overview 2 Short-term financial models 3 Volatility summary 7 Range-trading monitor 10 Option market positioning 11 Carry monitor Correlation monitor 14 Forecasts and market pricing 16 Central bank overview 18 FX trade overview 19 FX Market Update provides a quantitative overview of the currency market. We suggest entering a 3M EUR/TRY risk reversal at zero cost by buying a 3M (at-the-money spot) put option and selling 3M call (indicative prices, spot ref: ). However, it should be noted that tail risks on TRY are high and alternatively it could be considered to reduce the risk by paying a premium for the EUR/TRY put option: 3M put option costs an indicative upfront premium of 520 TRY pips. This strategy is profitable if EUR/TRY trades below (breakeven level) at maturity a level last seen on 21 August. Important disclosures and certifications are contained from page 21 of this report.

2 Spot overview Spot overview Spot change Trend Bollinger-bands 20-day MA 50-day MA Low-High RSI Direction Strength Sup./Res. -/+ 2 std dev EUR/USD % 1.39 / / EUR/JPY % 8.45 / / EUR/GBP % / / EUR/CHF % / / EUR/SEK % / / EUR/NOK % / / EUR/AUD % / / EUR/CAD % / EUR/NZD % / / EUR/PLN % / / EUR/RUB % / EUR/TRY % / EUR/CZK / / USD/JPY % / / GBP/USD % / / USD/CHF % / / USD/SEK % / / USD/NOK % / AUD/USD % / / USD/CAD % / / NZD/USD % / / USD/RUB % / / NOK/SEK % / / AUD/NZD % 1.50 / / Top 10 overbought range-trading currency pairs Currency pair RSI 1 GBP/JPY CAD/JPY NZD/JPY AUD/JPY GBP/CHF NOK/JPY AUD/USD GBP/USD AUD/SEK NZD/CHF 62.5 Top 10 oversold range-trading currency pairs Currency pair RSI 1 EUR/AUD EUR/GBP EUR/NZD USD/CAD EUR/NOK CHF/SEK GBP/NZD EUR/SEK EUR/USD USD/SEK 49.4 Note: Trend direction and strength computed using DMI analysis (range-trade defined as ADX line <25), trend support/resistance computed using Trender algorithm, Bollinger bands computed on 30-period window, RSI computed on 14-period window (oversold defined as <30, overbought defined as >70) Source: Bloomberg 2 10 September 20

3 Deviation (stdev) FX Market Update Short-term financial models Spot deviations from model estimate Today 1W ago 2W ago Spot above model Spot below model Spot deviations from model estimate eur Spot Model Signal Deviation (%) Deviation (stdev) EUR/USD % -0.9 EUR/JPY % -0.2 USD/JPY % -0.3 EUR/GBP % -0.6 EUR/CHF % -0.1 EUR/SEK % 0.3 EUR/NOK Overbought 2.1% 1.4 AUD/USD % 0.2 USD/CAD % -0.6 NZD/USD % 0.0 NOK/SEK % -0.9 EUR/PLN % 0.0 EUR/CZK % -0.4 AUD/NZD % -0.7 USD/SEK % 0.8 USD/NOK Overbought 2.0% 1.6 GBP/USD % 0.0 AUD/CAD % -0.5 Note: Linear regression models using a 200-day rolling estimation window. 2Y swap spread is included only when spot beta is positive. Short-term financial models are partial models, implying that there is no built-in consistency between, e.g., EUR/NOK, EUR/SEK and NOK/SEK models Source: Bloomberg, Danske Bank Markets calculations 3 10 September 20

4 EUR/USD(Model estimate: 1.334) EUR/USD model contributions EUR/USD EUR/USD Nov Jan Feb Mar Apr May Jun Jul Aug Sep USD/JPY(Model estimate: ) USD/JPY model contributions 115 USD/JPY USD/JPY Jul Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug EUR/GBP(Model estimate: 0.851) EUR/GBP EUR/GBP Feb Mar Apr May Jun Jul Aug Sep Dec Jan EUR/GBP model contributions 1.0% -1.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix European sovereign spread EUR/CHF(Model estimate: ) EUR/CHF model contributions EUR/CHF EUR/CHF % Dec Jan Feb Mar Apr May Jun Jul Aug Sep -1.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix European sovereign spread Note: Linear regression models using a 200-day rolling estimation window. 2Y swap spread is included only when spot beta is positive. Short-term financial models are partial models, implying that there is no built-in consistency between, e.g., EUR/NOK, EUR/SEK and NOK/SEK models Source: Bloomberg, Danske Bank Markets calculations 4 10 September 20

5 EUR/SEK(Model estimate: 8.671) 9.2 EUR/SEK EUR/SEK Feb Mar Apr May Jun Jul Aug Sep Dec Jan EUR/SEK model contributions 1.0% -1.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix European sovereign spread EUR/NOK(Model estimate: 7.752) 8.2 EUR/NOK Jul Aug Sep Oct Nov Dec Jan 8.2 EUR/NOK Feb Mar Apr May Jun Jul Aug Sep EUR/NOK model contributions 1.0% -1.0% -2.0% -3.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix Oil European sovereign spread EUR/JPY(Model estimate: 1.27) EUR/JPY model contributions 150 EUR/JPY 140 EUR/JPY % 2.0% % % % 90 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep % W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix European sovereign spread GBP/USD(Model estimate: 1.567) GBP/USD model contributions GBP/USD GBP/USD Dec Jan Feb Mar Apr May Jun Jul Aug Sep +/- 2 stdev Model estimate GBP/USD 2.0% 1.0% -1.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix European sovereign spread Note: Linear regression models using a 200-day rolling estimation window. 2Y swap spread is included only when spot beta is positive. Short-term financial models are partial models, implying that there is no built-in consistency between, e.g., EUR/NOK, EUR/SEK and NOK/SEK models Source: Bloomberg, Danske Bank Markets calculations 5 10 September 20

6 USD/CAD(Model estimate: 1.037) USD/CAD model contributions USD/CAD USD/CAD Feb Mar Apr May Jun Jul Aug Sep Dec Jan % 1.0% -1.0% -2.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix Oil AUD/USD(Model estimate: 0.925) AUD/USD model contributions AUD/USD AUD/USD Dec Jan Feb Mar Apr May Jun Jul Aug Sep 1.0% -1.0% -2.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix Oil NZD/USD(Model estimate: 0.810) NZD/USD model contributions NZD/USD NZD/USD Feb Mar Apr May Jun Jul Aug Sep Dec Jan % 1.0% -1.0% -2.0% -3.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix Oil EUR/PLN(Model estimate: 4.277) 4.7 EUR/PLN EUR/PLN Feb May Aug Nov Feb May Aug Nov 11 Feb May Aug EUR/PLN model contributions 1.0% -1.0% W-34 W-35 W-36 W-37 2Y swap spread 10Y swap spread Vix European sovereign spread Note: Linear regression models using a 200-day rolling estimation window. 2Y swap spread is included only when spot beta is positive. Short term financial models are partial models, implying that there is no built-in consistency between, e.g. EUR/NOK, EUR/SEK and NOK/SEK models Source: Bloomberg, Danske Bank Markets calculations 6 10 September 20

7 Volatility overview Current implied volatilities, one-week changes and actual volatilities 1W imp./chg. Act. / Spr. Z-scr. imp./chg. Act. / Spr. Z-scr. 3M imp./chg. Act. / Spr. Z-scr. 1Y imp./chg. Act. / Spr. Z-scr. -1Y slope/z-scr. EUR/USD 9.4% 6.3% % % 7.9% % 8.1% EUR/JPY 14.7% 10.1% % 9.9% % 11.9% 0.3.6%.7% USD/JPY.6% 10.1% 0.7.1% 10.4% 1.3.0%.7% % 11.5% GBP/USD 6.9% 5.7% % 6.2% % 8.3% % 7.2% EUR/GBP 6.1% 5.8% % 5.9% % 6.9% % EUR/CHF 4.4% 4.1% % 4.3% % 4.8% % 5.4% EUR/SEK 7.8% 8.2% % % 9.0% % 7.7% EUR/NOK 8.0% 10.8% % 9.7% % 10.4% % 7.8% EUR/AUD 8.0% 10.8% % 10.4% %.2% % 9.9% EUR/NZD 8.5% %.0% %.3% % 11.1% EUR/CAD 5.9% 7.7% % 7.2% % 8.1% % 8.2% EUR/PLN 8.7% 7.3% % 6.5% % 8.4% % 7.7% EUR/CZK 4.7% 4.1% % % 5.8% % 6.2% EUR/TRY.3% 15.6% %.9% 0.3.1% 11.2% 1.5.5% 8.6% EUR/RUB 6.8% 7.3% % 6.5% % 8.3% % 7.4% USD/CHF 7.7% 8.0% % 8.2% % 9.6% % 8.8% USD/SEK 9.5% 9.0% % 9.4% %.0% % 10.7% USD/NOK 9.7%.1% % 11.4% %.1% % 10.6% AUD/USD 8.6% 9.6% % 10.6% %.4% % NZD/USD 9.4% 11.3% %.2% % 14.4% % 11.4% USD/CAD 5.7% 5.9% % 5.6% % 7.6% % 6.6% NOK/SEK 8.1% 10.2% % % 9.9% % 7.8% USD/ZAR 14.8% 14.3% % 14.5% % 16.9% % 14.9% EUR/HUF 8.4% 8.2% % 7.4% % 8.8% % 9.5% USD/TRY.2% 14.9% %.6% % 11.4% % 7.9% USD/RUB 8.0% 6.6% % 5.6% % 7.8% % 7.7% volatilities (pct.'ile) 3M volatilities 1Y volatilities EUR/USD 7.6% 8.8% EUR/JPY 10.7% 11.5%.6% USD/JPY.1%.0%.0% GBP/USD 7.1% 7.1% 7.8% EUR/GBP 6.7% 6.9% EUR/CHF 5.2% 5.3% 5.4% EUR/SEK 7.2% 7.2% 7.2% EUR/NOK 8.5% 8.1% 7.6% EUR/AUD 9.4% 9.6% 10.2% EUR/NZD 9.8% 9.9% 10.5% EUR/CAD 6.8% 7.1% 7.8% EUR/PLN 8.7% 9.1% 9.7% EUR/CZK 5.6% 6.3% EUR/TRY.3%.1%.5% EUR/RUB 7.9% 8.4% 9.9% USD/CHF 9.1% 9.0% 10.1% USD/SEK 10.3% 10.1% 11.0% USD/NOK 10.8% 10.4% 11.0% AUD/USD 9.8% 9.8% 10.4% NZD/USD 10.5% 10.6% 11.1% USD/CAD 6.6% 6.6% 7.2% NOK/SEK 7.9% 7.6% 6.9% USD/ZAR 15.4% 15.6% 16.4% EUR/HUF 9.0% 9.5% 10.6% USD/TRY 14.2% 14.0% 14.3% USD/RUB 8.4% 8.6% 10.2% 0% 5% 20% 25% 0% 5% 20% 1Y interval Now Average 1W ago 0% 5% 20% Note: The table shows current levels of ATM implied volatilities, historical volatilities and the Z-score on the spread calculated using one year of observations. The last column shows the slope of the implied volatility term structure and a Z-score calculated using one year of observations. The chart shows current levels of, 3M and 1Y ATM implied volatilities, the level one week ago, the average level of the past year and the 1Y interval. Source: Bloomberg, Danske Bank Markets calculations 7 10 September 20

8 G10 and EM implied volatility cones EUR/USD 1W 3M M 22.5% USD/JPY W 3M M 2 EUR/JPY 1 1 1W 3M M EUR/GBP GBP/USD EUR/CHF 2.5% 1W 3M M 2.5% 1W 3M M 1W 3M M EUR/SEK 1W 3M M EUR/NOK 2.5% 1W 3M M 2 AUD/USD % 1W 3M M 2 NZD/USD 1 1 1W 3M M USD/CAD 2.5% 1W 3M M 1 EUR/PLN 1W 3M M EUR/CZK 2.5% 1W 3M M 1 EUR/RUB 2.5% 1W 3M M 2 USD/ZAR 22.5% W 3M M 1 EUR/HUF 1W 3M M 2 USD/TRY % 1W 3M M 1 USD/RUB 1W 3M M Note: The volatility cones show ATM implied volatilities for G10 and EM currency pairs Source: Bloomberg, Danske Bank Markets 8 10 September 20

9 G10 and EM implied volatility surfaces EUR/USD 1 USD/JPY 20% EUR/JPY 1 5% EUR/GBP GBP/USD EUR/CHF 5% 5% 0% EUR/SEK EUR/NOK 20% AUD/USD 5% 20% NZD/USD USD/CAD 20% EUR/PLN 5% 5% EUR/CZK 20% EUR/RUB 30% USD/ZAR 25% 20% 5% 5% 20% EUR/HUF 35% 30% 25% USD/TRY 20% USD/RUB 20% 5% 5% Note: The chart shows the implied volatility surface for G10 and EM currency pairs. Data is based on mid-prices and is indicative only. The data is shown for maturities of one and six months for various moneyness. Put deltas are denoted xp, while call deltas are denoted xc Source: Danske Bank Markets 9 10 September 20

10 Range trading monitor Ranking of range trade candidates # FX 1 week strategies Actual range Delta-neutral straddle Ratio* ADX** # FX Actual range 1 month strategies 3 month strategies Delta-neutral Ratio* ADX** # FX Actual straddle range Delta-neutral straddle Ratio* ADX** 1 USD/RUB 3525 pips 3097 pips EUR/RUB 7998 pips 8301 pips EUR/CHF 247 pips 260 pips EUR/SEK 972 pips 793 pips EUR/CHF 156 pips 148 pips EUR/PLN 1892 pips 1554 pips EUR/RUB 4737 pips 3784 pips EUR/SEK 1648 pips 1484 pips EUR/JPY 777 pips 628 pips W range trade no. 1- USD/RUB /08 10/08 15/08 20/08 25/08 30/08 04/09 09/09 14/09 1W range trade no. 2 EUR/SEK /08 10/08 15/08 20/08 25/08 30/08 04/09 09/09 14/09 range trade no. 1 EUR/RUB /05 20/06 20/07 20/08 20/09 range trade no. 2 EUR/CHF /05 20/06 20/07 20/08 20/09 3M range trade no. 1 EUR/CHF / 31/03 30/06 30/09 3M range trade no. 2 EUR/PLN / 28/02 30/04 30/06 31/08 31/10 Notes: Range trades are ranked by the realised range relative to the pay-off received by selling a straddle, with the strike set at-the-money (DNS convention).*a ratio below 1 implies that the historically realised range is smaller than the break-even range.**adx provides a measure of the strength of the trend in a given currency pair. Generally, a value above 25 characterises a pair that is trending. The bands in the charts show break-even levels. Indicative prices and levels Source: Bloomberg, Danske Bank Markets calculations September 20

11 Option market positioning and skew valuation 25-delta risk reversals (z-scores, vol adjusted) 25-delta risk reversals (z-scores, vol adjusted) 1W chg EUR/GBP EUR/USD AUD/USD EUR/PLN NZD/USD EUR/NOK EUR/SEK USD/JPY USD/CAD EUR/TRY EUR/CHF Cheap Rich Cheap Rich # Currency Z-score RR 1W chg # Currency Z-score RR 1W chg 1 TRY/JPY GBP/TRY TRY/SEK CAD/CHF TRY/NOK GBP/CHF CHF/SEK USD/CHF AUD/NZD EUR/CHF EUR/GBP CHF/TRY EUR/USD NZD/CHF EUR/CAD EUR/TRY NOK/SEK EUR/JPY NOK/JPY GBP/JPY Risk reversals explained by currency spot betas to equities Valuation signals from simple comparison with equity betas 'RR sign' = 'Risk beta sign' Residuals (simple model) # Currency Risk beta RR (adj) RR # Currency Residual RR (adj) RR 1 TRYNOK cheap 1 TRYNOK cheap 2 TRYSEK cheap 2 TRYSEK cheap 3 AUDNOK cheap 3 USDTRY rich 4 CHFSEK cheap 4 EURTRY rich 5 AUDCAD cheap 5 GBPTRY rich 6 EURTRY rich 6 TRYJPY cheap 7 AUDSEK cheap 7 CHFTRY rich 8 CADCHF rich 8 AUDCAD cheap 9 GBPCAD cheap 9 EURCHF rich 10 EURCHF rich 10 USDCHF rich EUR/USD 25-delta risk reversal USD/JPY 25-delta risk reversal 2 1 Calls more expensive than puts = +/- 2 std dev Calls more expensive than puts Puts more expensive than calls -3 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- -2 = +/- 2 std dev Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Note: Z-scores are computed using maximum available data and on risk reversals divided by ATM volatility. Spot beta to equities ( risk beta ) is the beta coefficient from a linear regression of weekly spot returns on weekly returns on the S&P500 equity index using a 1Y estimation window. Red broken lines in RR charts indicate the +/- 2 std dev band (computed on a volatility adjusted basis) Source: Bloomberg (synthetic risk reversal quotes are used for non-standard currency pairs), Danske Bank Markets calculations September 20

12 EUR/GBP 25-delta risk reversal EUR/CHF 25-delta risk reversal 1.5 Calls more expensive than puts 3 Calls more expensive than puts = +/- 2 std dev 1.0 = +/- 2 std dev Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- -2 Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- EUR/SEK 25-delta risk reversal EUR/NOK 25-delta risk reversal 2 Calls more expensive than puts 2 Calls more expensive than puts = +/- 2 std dev 1 = +/- 2 std dev Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- -1 Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- USD/CAD 25-delta risk reversal AUD/USD 25-delta risk reversal 2 Calls more expensive than puts = +/- 2 std dev 1 Calls more expensive than puts 0 = +/- 2 std dev Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- -4 Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- NZD/USD 25-delta risk reversal EM 25-delta risk reversal 1 Calls more expensive than puts 4 Calls more expensive than puts 0 3 EUR/PLN = +/- 2 std dev 1 EUR/TRY -3 0 Puts more expensive than calls -4 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- -1 Puts more expensive than calls Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Source: Bloomberg (synthetic risk reversal quotes are used for non-standard currency pairs), Danske Bank Markets calculations 10 September 20

13 Carry monitor Carry overview (against EUR) Carry in forward market (annualized) Carry-to-risk (carry / ATM volatility) 1W 3M 1Y 1W 3M 1Y EUR USD 0.1% 0.1% 0.1% 0.2% USD JPY JPY GBP 0.4% 0.4% 0.4% 0.4% GBP CHF -0.1% -0.2% -0.2% -0.2% CHF SEK 0.9% 1.0% 1.0% 1.0% SEK NOK 1.4% 1.6% 1.5% 1.6% NOK AUD 2.5% 2.7% 2.5% 2.5% AUD NZD 2.5% 2.8% 2.7% 2.9% NZD CAD 1.0% 1.0% 1.0% 1.1% CAD DKK -0.2% -0.2% -0.2% -0.2% DKK n/a n/a n/a n/a PLN 2.4% 2.5% 2.3% 2.4% PLN TRY 6.5% 7.7% 7.2% 8.1% TRY MXN 3.1% 3.1% 3.0% 3.1% MXN ZAR 5.1% 5.9% 5.5% 5.9% ZAR Top 10 carry currency pairs () Currency pair Carry-to-risk Carry 1 TRY/EUR % 2 TRY/USD % 3 AUD/EUR % 4 PLN/EUR % 5 NZD/EUR % 6 AUD/CHF % 7 NZD/CHF % 8 AUD/USD % 9 NZD/USD % 10 AUD/GBP % Top 10 carry currency pairs (3M) Currency pair Carry-to-risk Carry 1 TRY/EUR % 2 TRY/USD % 3 NZD/EUR % 4 NZD/CHF % 5 AUD/CHF % 6 AUD/EUR % 7 PLN/EUR % 8 AUD/USD % 9 NZD/USD % 10 NZD/GBP % G10 carry index (total return) G10 carry index (average deviation from PPP) G10 Carry index Interest rate gain Source: Bloomberg, Danske Bank Markets calculations 10 September 20

14 Correlation monitor Correlation monitor current levels (52-week window) and 10-week changes (arrows) USD JPY GBP CHF AUD NZD CAD SEK NOK PLN CZK HUF RUB TRY ZAR USD JPY 47% GBP 52% 61% CHF 4% 34% 35% AUD 41% 41% 51% % NZD 30% 34% 45% 7% 86% CAD 63% 54% 69% 65% 65% SEK 8% 16% 41% 35% 25% NOK 2% 19% 23% 5% 29% 34% 39% 58% PLN -41% -24% -21% 7% -1% 1% -9% 9% 33% CZK -28% -11% -3% -5% -22% -31% -23% -20% -% 25% HUF -22% -6% -17% 2% 0% % 8% % 34% 45% 4% RUB 37% 28% 25% -14% 43% 40% 43% 29% 31% 5% -2% 23% TRY 54% 34% 39% -2% 54% 56% 64% 43% 56% 1% -36% 16% 48% ZAR 40% 31% 42% 18% 54% 55% 53% 40% 41% 1% -19% 17% 39% 56% BRL 48% 16% 25% -4% 47% 38% 49% 41% 43% 11% -11% 18% 38% 53% 66% Notes: Correlations based on weekly changes using 52-week rolling window using EUR as numeraire. Arrows denote 10-week change in correlation. Source: Bloomberg. Highest correlation with MSCI world. Highest correlation with 2Y swap spr. Highest correlation with crude oil # FX Corr. (10w chg.) Beta 1 USDRUB -67% -0.51* 2 CHFPLN -55% -0.35* 3 JPYRUB -55% -0.61* 4 USDPLN -52% -0.54* 5 USDNOK -51% -0.47* 6 JPYPLN -49% -0.64* 7 USDCAD -48% -0.27* 8 USDHUF -47% -0.51* 9 USDSEK -47% -0.4* 10 GBPRUB -47% -0.35* # FX Corr. (10w chg.) Beta 1 CHFPLN -35% -0.08* 2 EURPLN -33% -0.07* 3 NOKSEK 33% 0.15* 4 JPYPLN -32% -0.* 5 USDNOK 31% 0.* 6 AUDPLN -31% -0.09* 7 USDCAD 30% 0.08* 8 NOKTRY 29% 0.01* 9 EURTRY 29% 0.01* 10 GBPPLN -28% -0.1* # FX Corr. (10w chg.) Beta 1 USDRUB -36% -0.19* 2 EURRUB -32% -0.15* 3 USDCAD -31% -0.* 4 CHFRUB -31% -0.16* 5 AUDRUB -30% -0.16* 6 SEKRUB -28% -0.14* 7 EURSEK 26% CHFCZK -26% NZDRUB -26% EURCZK -24% EUR/USD correlations USD/JPY correlations EUR/GBP correlations 1 Aluminium 55% 0.21* 2 USDCAD -53% -0.65* 3 EURGBP 53% 0.61* 4 USDTRY -48% -0.5* 5 Copper 47% 0.24* 6 Zinc 46% 0.19* 7 EURPLN -45% -0.56* 8 Global equit. 44% 0.31* 9 NZDUSD 43% 0.31* 10 Itraxx -41% -0.07* 1 Jap. equit. 68% 0.34* 2 Rel. equit. -66% -0.39* 3 Gold -41% -0.25* 4 US10YSWP 40% 0.06* 5 USDCAD 40% 0.69* 6 US10YGOV 40% 0.05* 7 AUDUSD -34% -0.4* 8 EURGBP 33% 0.53* 9 US2YSWP 32% 0.16* 10 US2YGOV 32% 0.19* 1 EURUSD 53% 0.46* 2 USDJPY 33% 0.2* 3 US10YGOV 30% 0.03* 4 Itraxx -30% -0.05* 5 Global equit. 27% 0.16* 6 Jap. equit. 25% US10YSWP 25% EURPLN -23% GR10YGOV -23% 0 10 Aluminium 22% 0.08 Notes: Correlations and betas are calculated using a rolling window of 52 weeks. Arrows denote the change in correlation over the past 10 weeks. Significant betas (at 95% confidence level) are denoted by an asterisk Source: Bloomberg, Danske Bank Markets calculations September 20

15 EUR/CHF correlations EUR/SEK correlations EUR/NOK correlations 1 G10 Carry -38% -0.39* 2 AUDUSD -33% -0.25* 3 USDTRY 30% 0.28* 4 NZDUSD -25% US10YGOV 23% Aluminium 19% Y10Y spr. 18% US2YGOV 18% FX volatility 18% US10YSWP 18% EURNOK 50% 0.39* 2 10Y swp. spr. 45% 0.11* 3 Rel. equit. -39% -0.2* 4 Crude oil 26% USDTRY 23% GR10YGOV 22% 0 7 2Y swp. spr. 22% IT10YGOV 19% 0 9 IT10YGOV 19% Y10Y spr. 18% EURSEK 50% 0.65* 2 Zinc -37% -0.08* 3 Aluminium -33% -0.07* 4 IT10YGOV 30% 0.01* 5 IT10YGOV 30% 0.01* 6 G10 Carry -29% -0.17* 7 USDTRY 26% Itraxx 23% Y swp. spr. 21% Crude oil 20% 0.05 USD/SEK correlations USD/NOK correlations NOK/SEK correlations 1 EURUSD -70% -0.88* 2 EURCHF 61% 0.85* 3 USDTRY 60% 0.78* 4 AUDUSD -55% -0.57* 5 NZDUSD -53% -0.48* 6 USDCAD 51% 0.79* 7 Global equit. -47% -0.4* 8 Ger. equit. -43% -0.26* 9 Itraxx 39% 0.09* 10 Copper -39% -0.24* 1 USDTRY 75% 1.03* 2 EURUSD -73% -0.98* 3 USDCAD 66% 1.09* 4 EURPLN 54% 0.9* 5 NZDUSD -52% -0.5* 6 Global equit. -51% -0.47* 7 US2YSWP 51% 0.24* 8 Itraxx 50% 0.* 9 Ger. equit. -50% -0.32* 10 AUDUSD -46% -0.51* 1 EURCHF 45% 0.41* 2 US2YSWP -42% -0.* 3 US2YGOV -37% -0.* 4 2Y swp. spr. 33% 0.15* 5 US10YSWP -32% -0.03* 6 EURPLN -30% -0.31* 7 USDTRY -30% -0.25* 8 USDCAD -29% -0.3* 9 IT10YGOV -26% IT10YGOV -26% AUD/USD correlations NZD/USD correlations USD/CAD correlations 1 NZDUSD 86% 0.75* 2 G10 Carry 68% 0.92* 3 USDCAD -60% -0.89* 4 USDTRY -55% -0.69* 5 FX volatility -45% -0.14* 6 Gold 41% 0.22* 7 EURUSD 39% 0.47* 8 US2YSWP -37% -0.16* 9 USDJPY -34% -0.29* 10 EURPLN -34% -0.52* 1 AUDUSD 86% 0.98* 2 G10 Carry 70% 1.09* 3 USDCAD -67% -1.14* 4 USDTRY -64% -0.91* 5 FX volatility -51% -0.19* 6 US2YSWP -44% -0.21* 7 EURUSD 43% 0.6* 8 Gold 38% 0.23* 9 Copper 37% 0.26* 10 US2YGOV -37% -0.22* 1 NZDUSD -67% -0.4* 2 USDTRY 62% 0.52* 3 AUDUSD -60% -0.41* 4 Copper -55% -0.23* 5 Gold -54% -0.19* 6 EURUSD -53% -0.43* 7 FX volatility 51% 0.11* 8 US2YSWP 50% 0.14* 9 Global equit. -48% -0.27* 10 EURPLN 42% 0.42* EUR/CZK correlations EUR/RUB correlations EUR/PLN correlations 1 Aluminium -35% -0.09* 2 Itraxx 34% 0.04* 3 EURUSD -32% -0.2* 4 Copper -32% -0.1* 5 EURPLN 30% 0.24* 6 Zinc -29% -0.08* 7 US10YGOV -28% -0.02* 8 Ger. equit. -27% -0.08* 9 Global equit. -26% US10YSWP -26% G10 Carry -38% -0.41* 2 Ger. equit. -34% -0.16* 3 EURUSD 33% 0.33* 4 Global equit. -33% -0.22* 5 Crude oil -32% -0.15* 6 US2YGOV 32% 0.14* 7 US equit. -31% -0.21* 8 Jap. equit. -31% -0.11* 9 US2YSWP 29% 0.1* 10 EURCHF 27% Itraxx 50% 0.07* 2 US2YSWP 46% 0.* 3 USDTRY 46% 0.37* 4 EURUSD -45% -0.36* 5 Global equit. -45% -0.24* 6 10Y swp. spr. -42% -0.06* 7 USDCAD 42% 0.41* 8 FX volatility 39% 0.08* 9 US equit. -36% -0.2* 10 AUDUSD -34% -0.23* EUR/HUF correlations USD/TRY correlations USD/ZAR correlations 1 US2YSWP 47% 0.18* 2 EURPLN 43% 0.57* 3 USDTRY 40% 0.44* 4 Copper -35% -0.19* 5 USDCAD 35% 0.45* 6 US2YGOV 34% 0.15* 7 Global equit. -30% -0.21* 8 US equit. -29% -0.22* 9 US10YSWP 26% GR10YGOV 26% 0 1 US2YSWP 65% 0.23* 2 NZDUSD -64% -0.45* 3 US2YGOV 62% 0.26* 4 USDCAD 62% 0.73* 5 AUDUSD -55% -0.45* 6 G10 Carry -53% -0.58* 7 EURUSD -48% -0.47* 8 US10YSWP 47% 0.05* 9 EURPLN 46% 0.55* 10 FX volatility 45% 0.11* 1 US2YSWP 52% 0.31* 2 USDTRY 50% 0.87* 3 NZDUSD -48% -0.58* 4 AUDUSD -45% -0.62* 5 USDCAD 41% 0.84* 6 US2YGOV 41% 0.3* 7 G10 Carry -36% -0.67* 8 FX volatility 34% 0.15* 9 US10YSWP 34% 0.06* 10 US10YGOV 33% 0.05* Notes: Correlations and betas are calculated using a rolling window of 52 weeks. Arrows denote the change in correlation over the past 10 weeks. Significant betas (at 95% confidence level) are denoted by an asterisk. Source: Bloomberg, Danske Bank Markets calculations September 20

16 Danske 3M forecast vs. consensus FX Market Update Forecasts and market pricing Danske Bank Markets FX forecasts Forecast Forecast vs spot, % change Forecast vs forward outright, % Spot +1m +3m +6m +m +1m +3m +6m +m +1m +3m +6m +m Exchange rates vs EUR USD % -1.1% -3.4% -5.7% -1.1% -1.2% -3.5% -5.8% JPY % -2.7% -0.4% 4.1% -3.4% -2.7% -0.4% 4.1% GBP % -0.5% -2.8% -0.5% 0.7% -0.6% -3.0% -0.9% CHF % 1.8% 0.2% 0.2% 1.0% 1.9% 0.3% 0.5% DKK % 0.1% 0.2% NOK % -2.7% -3.4% -4.0% -2.9% -3.1% -4.1% -5.5% SEK % -3.3% -4.5% -5.6% -2.2% -3.5% -4.9% -6.6% Exchange rates vs USD CAD % 4.0% 6.0% 3.9% 3.8% 8.3% 8.7% AUD % -3.0% -5.1% -8.4% -2.8% -2.4% -4.6% -6.2% NZD % -1.8% -4.3% -6.7% -4.0% -1.1% -3.6% -4.1% Note: AUD and NZD are denominated in local currency rather than USD Danske Bank forecasts vs forwards and consensus 6% EUR/USD 1.50 EUR/USD 4% 2% USDTRY EURGBPEURPLN 0% EURUSD EURNOK EURJPY EURCHF EURSEK USDCAD -2% NZDUSD AUDUSD -4% -4% -2% 0% 2% 4% Danske 3M forecast vs. forward EUR/USD 3M M Forecast (pct'ile) 1.31 (41%) 1.31 (41%) 1.28 (28%) 1.25 (25%) Fwd. / Consensus 1.31 / / / / % confidence int / / / / % confidence int / / / / 1.44 USD/JPY USD/JPY EUR/GBP 0.95 EUR/GBP USD/JPY 3M M Forecast (pct'ile) (31%) (44%) (65%) (82%) Fwd. / Consensus / / / / % confidence int / / / / % confidence int / / / / 1.93 EUR/GBP 3M M Forecast (pct'ile) 0.85 (65%) 0.84 (44%) 0.82 (27%) 0.84 (46%) Fwd. / Consensus 0.84 / / / / % confidence int / / / / % confidence int / / / / 0.92 EUR/CHF 1.35 EUR/CHF EUR/SEK 9.75 EUR/SEK EUR/CHF 3M M Forecast (pct'ile) 1.25 (79%) 1.26 (80%) 1.24 (62%) 1.24 (59%) Fwd. / Consensus 1.24 / / / / % confidence int / / / / % confidence int / / / / 1.30 EUR/SEK 3M M Forecast (pct'ile) 8.50 (8%) 8.40 () 8.30 (%) 8.20 () Fwd. / Consensus 8.77 / / / / % confidence int / / / / % confidence int / / / / 9.52 Note: The cone charts show confidence regions derived from option market prices. Source: Bloomberg and Danske Bank Markets calculations September 20

17 EUR/NOK 9.00 EUR/NOK AUD/USD 1.10 AUD/USD EUR/NOK 3M M Forecast (pct'ile) 7.70 (3%) 7.70 (%) 7.65 () 7.60 (18%) Fwd. / Consensus 8.06 / / / / % confidence int / / / / % confidence int / / / / 8.83 AUD/USD 3M M Forecast (pct'ile) 0.90 (30%) 0.90 (37%) 0.88 (31%) 0.85 (27%) Fwd. / Consensus 0.91 / / / / % confidence int / / / / % confidence int / / / / 1.00 NZD/USD USD/CAD 0.90 NZD/USD 1.15 USD/CAD NZD/USD 3M M Forecast (pct'ile) 0.77 (24%) 0.79 (51%) 0.77 (38%) 0.75 (36%) Fwd. / Consensus 0.79 / / / / % confidence int / / / / % confidence int / / / / 0.86 USD/CAD 3M M Forecast (pct'ile) 1.04 (37%) 1.04 (44%) 1.05 (55%) 1.06 (59%) Fwd. / Consensus 1.05 / / / / % confidence int / / / / % confidence int / / / / 1.14 EUR/JPY 150 EUR/JPY GBP/USD 1.70 GBP/USD EUR/JPY 3M M Forecast (pct'ile) 8.00 (20%) 9.00 (34%) 2.00 (48%) 8.00 (64%) Fwd. / Consensus 1.44 / / / / % confidence int / / / / % confidence int / / / / GBP/USD 3M M Forecast (pct'ile) 1.51 (8%) 1.55 (37%) 1.56 (44%) 1.49 (25%) Fwd. / Consensus 1.56 / / / / % confidence int / / / / % confidence int / / / / 1.69 EUR/PLN 4.80 EUR/PLN USD/TRY 2.50 USD/TRY EUR/PLN 3M M USD/TRY 3M M Forecast (pct'ile) 4.20 (19%) 4.15 (18%) 4.20 (34%) 4.25 (43%) Forecast (pct'ile) 1.93 (5%) 1.94 (%) 2.00 (29%) 2.04 (35%) Fwd. / Consensus 4.29 / / / / 4.09 Fwd. / Consensus 2.08 / / / / % confidence int / / / / % confidence int / / / / % confidence int / / / / % confidence int / / / / 2.50 Note: The cone charts show confidence regions derived from option market prices. Source: Bloomberg, Danske Bank Markets calculations September 20

18 Central bank overview ECB market pricing 2.50% 2.00% 1.50% 1.00% 0.50% 0.50% EUR/OIS forward market % Sep Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Current Live Refinance Rate Fed market pricing 3.50% USD/OIS forward market 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% % 0.25% Sep Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Current Live Fed Funds Target Rate US DK Nationalbank market pricing BoE market pricing 2.50% DKK/OIS forward market 3.00% GBP/OIS forward market 2.00% 1.50% 1.00% % % 0.20% Sep Mar 14 Sep 14 Mar 15 Sep 15 Mar % Current Live Repo Rate % 2.00% % % % 0.50% 0.00% Sep Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Current Live UK Official Bank Rate Norges Bank market pricing 4.00% 3.50% 3.00% % 2.00% % 1.50% 1.00% 0.50% NOK/OIS forward market 0.00% Sep Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Current Live Deposit Rate Riksbank market pricing 3.50% 3.00% % % % % 1.00% 0.50% 0.00% Sep Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Current Live SEK/OIS forward market SWEDEN - REPO RATE Note: The charts show the cumulated market pricing of rate changes on meeting dates Source: Danske Bank Markets September 20

19 FX trade overview FX trade recommendations Open FX Trades Type Trade Idea Target & P/L* Option Option Option Option Option Forward Enter USD/JPY risk reversal Sell 1Y EUR/USD call spread Short EUR/NOK via 3M risk reversal Short EUR/GBP via 3M seagull Short EUR/CHF via options Buy EUR/DKK 3M forward Open FX Trades We expect further JPY weakness to materialize and recommend entering a new USD/JPY risk reversal at zero costs (sell putand buy call). The strategy utilizes the significant correction lower in the option skew into negative territory. and Danske extends Bank: maturity Sell 1Y EUR/USD on our long call spread 91) We recommend selling a 1Y EUR/USD call spread for an indicative premium of USD 590 pips (spot ref ) to position for medium-term downside. We recommend selling a 3M EUR/NOK risk reversal at zero cost. We prefer the risk reversal to a spot position due to the very attractive pricing (skew) in the option market. We recommend positioning for a move lower in EUR/GBP via a 3M seagull: buy put, sell call and sell put at zero cost. We believe that further unwinding of short GBP positions will take place over the autumn. We recommend positioning for a move higher in EUR/CHF via a 1:2 ratio 3M/ calendar risk reversal. The strategy can be entered at zero cost by selling 3M put option (double notional) and buying call option. we recommend buying EUR/DKK 3M forward at for an indicative 25bp annualised carry. Opened 22/03/20 Start Target/Stop n/a Now P/L 2.55% Opened 08/07/20 Start 4.59% Target/Stop n/a Now -5.74% P/L -1.16% Opened 09/08/20 Start 0.00% Target/Stop n/a Now 0.00% P/L -0.31% Opened 20/08/20 Start 0.00% Target/Stop n/a Now 0.00% P/L 0.73% Opened 20/08/20 Start 0.00% Target/Stop n/a Now 0.00% P/L 0.42% Opened 20/08/20 Start 0.00% Target/Stop n/a Now 0.00% P/L 0.02% Closed FX Trades Closed FX Trades # Type Trade Opened Level Closed Level P/L 1 Option USD/JPY Seagull 15/08/ /02/ % 2 Option -3M EUR/SEK call calendar spread 02/10/ /01/ % 3 Spot Buy RUB, AUD, NOK versus USD 19/09/ /04/ % 4 Spot Buy EUR/CZK 05/11/ /04/ % 5 Spot Buy MXN/JPY spot 04/04/ /04/ % 6 Spot Sell CHF/NOK 22/03/ /04/ % 7 Option Sell 3M EUR/CHF put spread 28/02/ /04/ % 8 Option Enter AUD/USD seagull 16/05/ /06/ % 9 Option Sell GBP/SEK spot 22/04/ /06/ % 10 Option Sell 2W CHF/JPY straddle 28/05/ /06/ % 11 Option Enter 3M GBP/CAD call spread 22/03/ /06/ % Spot Long USD vs. Short EUR, JPY, GBP, CHF 02/08/ /08/ % Option Short EUR/SEK via Seagull 31/07/ /08/ % FX Trades 20 Overview FX Trade Performance 20 # Cum Return Avg Return Avg Days Open Profitable 18.2% 1.4% 169 days Loss-Making % -1.8% 73 days All Trades % 0.4% 116 days Source: Danske Bank Markets September 20

20 FX and Commodities Research Arne Lohmann Rasmussen Head of FX Research NOK, SEK, DKK Kasper Kirkegaard Senior Analyst G Stefan Mellin Senior Analyst SEK Morten Helt Senior Analyst G Christin Kyrme Tuxen Senior Analyst Commodities September 20

21 Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The author of the research report is Morten Helt, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-u.s. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission September 20

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