FxWirePro: Deploy Cable’s Reverse Knock-Out Options Amid Geopolitical And Economical Matters

Geopolitics in Europe is lingering across the eurozone, with German Chancellor Merkel’s coalition under pressure again on immigration issues. The UK PM Theresa May is hosting her cabinet at Chequers to hammer out an agreed post-Brexit position that is in the limelight. After Mr Seehofer (CSU, Mrs Merkel’s Bavarian sister party) offered to step down as party leader and Interior Minister, the quarrel between Mrs Merkel’s CDU and the CSU escalated, and a government breakup is not off the table.

Nonetheless, during trade in Asia, the EURUSD exchange rate has barely been impacted by the political turmoil in Germany. Luckily, political crises are not economic crises.

On the data front, we get UK manufacturing PMIs, the headline index increased to 54.4 in May, supported by a notable rise in the output component, although growth in new orders slipped slightly. UK’s June service PMIs is forecasted to surge 54.5 from previous 54 levels that could match this year’s highs.

In addition, the release of the BoE’s latest Financial Stability report yesterday this week highlighted the material risks of a disruption to financial services from Brexit, a finding that is at odds with the rather more insouciant attitude of a hawkish-leaning MPC and also the front-end of the UK curve (which prices a 2/3 chance of an August hike).

All these bearish driving forces seem to be factored-in OTC markets. Please be noted that the positively skewed IVs of 1m tenors signify the hedgers’ interests to bid OTM put strikes upto 1.29 levels (refer above nutshell evidencing IV skews).

Although you can observe risk reversal numbers of cable (GBPUSD) that signals bearish risks remain intact (refer above nutshell showing risk reversals).

Hence, we keep a vestigial option short in cable through a 1m put RKO. We will collect time decay from the RKO assuming cable is held in check close to the 1.31 strike over the next few weeks by the conflicting forces of less impressive US data and a continued lack of progress on Brexit. The next potential Brexit flashpoint focus will be the cabinet offsite next Friday at which the PM will once again attempt to hammer out a common government position on customs policy, the single market, and associated Brexit red-lines.

Square off cable’s any short positions in spot trades for a considerable return.  While Activate a 1.31 GBPUSD put, RKO 1.28 expiry 27 July. Paid11.5bp, marked at 10bp. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 48 levels (which is bullish), while GBP is flashing at -16 (which is neutral) while articulating at (05:25 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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