FxWirePro: Brexit Developments Visible in Sterling’s OTC Markets

Without wanting to bore you all with the details of the news flow on Brexit: the news that reached us over the weekend can all be interpreted in a GBP positive manner. However, Sterling is unable to benefit particularly on the Asian markets this morning. 

The interpretation of that could be, positive news of the sterling, at current levels, are largely factored-in. The residual uncertainty does not justify a further GBP rally. 

That also means: over the next few days the risks are asymmetrical. Any news that might shake the confidence of the markets will have major GBP negative effects. Such news is – it has to be said – rather unlikely though. 

At present it looks as if the Brexiteers amongst the Tories are preparing for a total defeat. As became clear in the aftermath of the referendum: their pithy talk was largely hot air.

GBP OTC Updates: 

The positive bids in the shorter tenors have been observed to the bearish risk reversal atmosphere in the GBP OTC markets, this is interpreted as the hedgers are keen on bullish risks in the short-run, whereas the long-term bearish outlook remains intact.

You could easily make out that the positively skewed IVs of EURGBP have been stretched out on either side. This is interpreted as the hedgers bid for both OTM calls and OTM put options.

A year on from last year’s catastrophic VIX shock that by all accounts had drawn a line under 2017’s anomalous low volatility regime, February 2019 is ending with G7 FX volatility re-testing cycle lows from 1Q18. 1M ATM vols across the majors have now fallen well below 6.0 (EUR 1M 5.5, JPY 1M 5.6); even at such low levels, VXY G7 is arguably being held up artificially to some extent by the idiosyncratic Brexit premium in GBP options (GBP 1M 10.1) and perhaps a lingering trace of US/China tensions in AUD (1M 8.3). 

On the whole, FX volatility now screens 3% pts. too low, a hefty 2-std. error deviation from cyclical fair value (refer above chart) last witnessed during the great vol slump of 2Q’14 before mounting expectations of a Fed hiking cycle kicked off the dollar’s multi-year bull run, and before that only once prior to the EM upheaval of the late’90s. Courtesy: JPM 

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 37 levels (which is mildly bullish), while hourly USD spot index was at 112 (highly bullish) while articulating (at 14:54 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex