On a multi-day/week basis, traders should perhaps short the Australian dollar against the Norwegian krone, according research from Richard Franulovich of Westpac Institutional Bank.

Franulovich constructed two relative value models.

The first model uses business confidence, consumer confidence, and the OECD’s leading indicators to rank economic growth momentum.

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The second model uses commodity prices, interest rate spreads, and risk appetite to rank deviation from equilibrium valuation.width=630

The Australian dollar is the only G10 currency in both the top quartile for valuation (meaning it is overvalued) and bottom quartile for economic growth momentum.

The Norwegian krone, contrastingly, ranks the second lowest for valuation and the second highest for growth momentum.

Franulovich acknowledged that in the short-term, movements in the currency market will likely be driven by risk-on and risk-off sentiment rather than relative value.  

However, what makes an AUD/NOK short interesting is that AUD and NOK are both risk-on currencies due to their ties to commodities and relatively high interest rates.

Therefore, an AUD/NOK short is theoretically protected to a large degree against swings in risk sentiment and should eventually trade on relative value considerations.