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Although the recent fall in GBP volatilities on the options markets (refer above chart) does not really make total sense, a question pops-up in our mind, has the uncertainty concerning Brexit really fallen in the eyes of the market since the vote in the House of Commons was postponed? Of course, it was clear that Prime Minister Theresa May would lose the vote on her withdrawal agreement.
However, if the vote had taken place the deal would have finally been off the agenda and we would have made a tiny little bit of progress. May will now spend the next four weeks, as she herself has explained, somehow trying to save her deal by trying to get some assurances from the EU 27 about the Irish backstop.
The quieter sentiment on the markets has got one major advantage. For all those who may not have hedged their GBP risks yet, the current situation provides a reasonably attractive entry level.
FX Options Strategy (Stay short EURGBP though a ratio put spread): In early November, we sensed that the UK was close to securing a negotiated and therefore somewhat reassuring exit from the EU. We positioned for a modest albeit distinctly bounded relief rally in GBP through a ratio put spread.
Please be noted that the positively skewed IVs of this pair is also indicating the upside risks, while risk reversals are also signaling the same.
Hold a 2m 1x1.5 EUR put/GBP call spread, 0.87- 0.8550 with an 0.84 RKI on the lower strike. Expiry January 3, 2019. Paid 39bp in November. Marked at 2bp.
Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 102 levels (which is bullish), while hourly GBP spot index was at -34 (bearish) while articulating at (11:25 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
