FxWirePro: Heads Up On Weekly FX Derivatives Market

Despite some welcome improvements in select areas on the global health stage, the spread of COVID-19 continues to exacerbate economic outcomes. Data released this week illustrate just how difficult it currently is to accurately benchmark the downward trajectory. The end-game from an economic standpoint therefore remains extremely hazy, and warrants sticking to a defensive portfolio. 

Extreme USD funding stress has abated along with a sizable increase in dollar liquidity. This provides a headwind, but is not sufficient by itself to frustrate, further USD strength.

We utilize a tactical Gamma indicator to gain insight in the timing of a recovery. The current value of the indicator (+62% vs. the max of +75%) is still well within the risk-aversion area, keeping us defensive and prompting us to limit our downside when harvesting risk premium. 

Historically wide AUD and to large degree CAD skews are best faded via 1*1 vol ratio spreads, as our gamma filtering suggests. 

DNTs can allow fading elevated vol premia at defined downside while also yielding attractive risk/reward profiles. EURJPY tops the list thanks to the sharp rebound in implied vols even as spot remained in a tight 5% range over the past 10 months.

RUB vs ZAR is a pocket of EM vega where we feel comfortable considering an RV as 6M ATM vol differential between RUB and ZAR shot up to near the widest in two years. 

The vol curves suggest a quick resolve but we are doubtful that we are out of the woods just yet and find back-end USDINR and USDJPY forward vols to be attractive to own. Courtesy: JPM