The direct corollary of this softness in vols at higher USD index risk-reversals is the continuation of USD skew underperformance.

The climb of USDCNH to its historical highs is a perfect illustration of this dynamic since 2014:

USD strengthening vs high beta currencies has tended to happen in a low vol regime, outside a few isolated exceptions (for instance: Aug 2015 CNY devaluation, Q4 2014 Oil collapse and impact on RUB, and recently Aug-Sep MXN sell-off on US Election risk), and selling USD skews has been a consistent alpha generation strategy over the past two years.

For investors looking to participate in further USD strengthening while fading rich skews, we suggest 1x2 USD call spreads for the leverage and positive carry they offer.

We rank 6M 1x2 ratio USD call spreads with long strikes ATMS and short strikes solved for 50bp premia, where it clear that the most comfortably wide breakeven ranges are achieved by USD/Asia pairs, notably USDTWD (strikes 31.62 x 33.0, breakeven at 34.36 and returning max payout - 8:1).

The jump of Euro-area composite PMIs to 53.7 (10-month highs) on Monday should alleviate downside pressure on EURUSD, as this is poised to give the ECB second thoughts about QE extension in December.

With the USD index having closed most of its undervaluation gap relative to high-frequency drivers and following a foray of EURUSD into the low 1.09s – which pushed USDPLN close to the recent highs just a touch below 4.0, we find it compelling to sell USDPLN skews.