FxWirePro: Choosy vega dollar buying ahead of rest of busy September eyeing G3 bond yields

USD-vols have become potential buying targets after Fed communication since the Jackson Hole symposium breathed some life into the dollar. Fears of an imminent Fed hike in September may have proven unfounded after a soft-side August payrolls print, but the fact remains that USD TWI still trades materially cheap to rate differentials and investor positioning in the greenback is  stretched quite short (near pre-taper tantrum levels on IMMs).

Hence, the realized volatility risks are asymmetric with respect to dollar direction from here (volatile rallies, tepid selloffs).

The flipside of the dollar set-up is that investor leverage in carry trades has steadily built up over the past two months, which could have an unfriendly encounter with ECB and BoJ meetings later this month.

Perceptions that the ECB and BoJ are handicapped in terms of additional easing can lead to a sharp backup in G3 bond yields if markets read any reticence to move in September as a cue for eventual tapering.

While in Fed’s stances, it is becoming increasingly clear that there is a battle of convictions taking place amongst FOMC members. Only at first glance is this battle about when (September, December,) and if the Fed would hike its key rate again (its target for the Fed Funds rate).

GBP/USD is currently boosted by short covering and recent data resilient to the Brexit shock. But the second leg of weakness is due, as Article 50 has not been invoked yet and the BoE may cut rates again. Hence, we bid for 2m GBP puts against USD calls.