If for a moment we ignore the latest market turmoil and look at the data and relative value, the commodity and high beta currencies in G10 seem to be cheap. Australia and Sweden have the most positive data surprises in G10 (Chart 7). Norway has the highest inflation rate (Chart 8). CAD and NOK are the most undervalued G10 currencies, while USD and CHF the most overvalued. A heatmap of data, fundamentals and positioning would support buying NOK, CAD and SEK against CHF, USD and JPY.

However, this is the same as saying that risk-on currencies will do well if risk appetite increases, or at least markets stabilize. In particular, AUD should benefit from stabilization in China, while NOK and CAD should benefit from stabilization in oil prices.

Instead of trading FX for risk-on vs. risk-off, or trying to time the shifts in global risk appetite, we would prefer to trade based on relative value within each currency group. 

Within the funding currencies (risk-off) group, we would be buying dips in JPY and SEK and sell rallies in EUR and CHF. Within the risk-on currencies, we would be long AUD against NZD and Asia EMFX.

This is our strategy for at least the first half of this year, or until monetary policy divergence becomes a market driver against, which would require both more ECB easing and the next Fed hike.

This is indeed the approach we followed in our year ahead report and is driving our latest G10 FX projections.

This article originally appeared at eFXnews.