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24 Feb 2015
Danish National Bank’s actions have propelled EUR/DKK to top of its league – JPM
FXStreet (Barcelona) - The J.P.Morgan Team explains how Danish National Bank has generated one of the best vol adjusted carry trades using EUR/DKK.
Key Quotes
“Four deposit rate cuts from the Danish NB to discourage speculative inflows have aligned the carry in 1Y EUR/DKK with that of EUR/CHF, while vols - not only realized but also implied, remain constrained. Granted, liquidity is very thin on the DKK vol market, with vol supply on the interdealer market originating almost exclusively from local Danish participants.”
“Nonetheless, by fighting the market on one side of the spot distribution, the DNB is making EUR/DKK one of the very best pairs to play option carry in through the form of call spreads on EUR/DKK with the long leg at the forward, not because of the width of yield differentials (1.2% annualised) but because of its anchor to the EUR, which officials keep reaffirming on a daily basis.”
Key Quotes
“Four deposit rate cuts from the Danish NB to discourage speculative inflows have aligned the carry in 1Y EUR/DKK with that of EUR/CHF, while vols - not only realized but also implied, remain constrained. Granted, liquidity is very thin on the DKK vol market, with vol supply on the interdealer market originating almost exclusively from local Danish participants.”
“Nonetheless, by fighting the market on one side of the spot distribution, the DNB is making EUR/DKK one of the very best pairs to play option carry in through the form of call spreads on EUR/DKK with the long leg at the forward, not because of the width of yield differentials (1.2% annualised) but because of its anchor to the EUR, which officials keep reaffirming on a daily basis.”