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The British parliament still has one last opportunity to approve the withdrawal agreement today which will postpone Brexit until 22nd May. Approval is unlikely, which will bring other options into focus, none of which has yet been able to find a parliamentary majority. A "hard" Brexit on 12 April is by no means off the table.
As Theresa May does not want to abandon the possibility of a third vote in the House of Commons we might see a bizarre compromise that gives her sufficient time to arrange such a vote possibly with further (“clarifying”) letters from Brussels. That makes the time frame during which a no-deal risk is particularly virulent completely unclear once again. That makes exactly GBP volatility more attractive. It flashes 13.5% - 10.9% for 1m-3m tenors which is the highest among G10 FX bloc.
It is possible that one might have to pay for a long time for the time premium until the development into the one or other direction finally materializes.
OTC outlook: Thefreshpositive bids are observed in GBPUSD risk reversals of the short-term tenors. While positively skewed implied volatilities of 3m tenors still signal bearish hedging sentiments. To substantiate this downside risk sentiment, bearish risk reversals of longer tenors remains intact.
As rightly stated in our previous write-up, it is reckoned that the sterling should not suffer like before, but, one should not completely disregard the hiking cycle on the other hand. The market has always ignored the fact that all the current BoE interest rate moves are due to a favorable result of the Brexit process.
Hence, both the speculators and hedgers of GBPUSD are advised to capitalize on the prevailing price rallies for bearish risks and bidding theta shorts in short run (1m IVs) and 3m risks reversals to optimally utilize delta longs.
Strategic Options Recommendations: On hedging grounds, fresh delta longs for long-term hedging comprising of ATM instruments and OTM shorts in short-term would optimize the strategy.
So, the execution of hedging positions goes this way: Short 1m (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, initiate longs in 3m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium.
Thereby, the above positions address both upswings that are prevailing in the short run and bearish risks in the long run by delta longs. Courtesy: Sentrix, Saxo & Commerzbank
Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -111 levels (which is highly bearish), and hourly USD spot index has bearish index is creeping at 99 (bullish) while articulating (at 10:00 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
