FxWirePro: Perspectives of EMFX and prospects in options strategies

EM FX has depreciated against the dollar (CEE FX has outperformed in line with a higher EUR/USD), as core yields have continued to move higher (bund yields: +32bp, 10y UST yields: +25bp) and commodity prices have softened.

This publication provides a quantitative and graphical snapshot of the volatility market in the EMFX universe. We layer in qualitative directional views for three currency pairs. 

Directional views in vol space

RUB: USDRUB could continue heading higher. In this scenario call spreads or appearing call spreads are preferred given the high volatility and high skew-to-vol. 

MXN: We find owning volatility through downside USDMXN structures attractive. A USDMXN 6m European Digital put strike 16.20 provides around a 10x payoff. 

CNH: We believe downside optionality offers the best value and vol would go lower with the spot. A  USDCNH 3m put strike 6.75 RKO 6.60 costs around 0.18% (vanilla is about 0.36%) and covers the period preceding the leadership changes in 4Q. 

Vol and skew beta: The sensitivity of average EM implied vol and risk reversals to changes in underlying spot rates is near five-year lows, except in BRL where it is high.

Value: Based on the position of volatility to its one-year range and carry costs, we find that most EM currencies are cheap, particularly the CEE dollar crosses, SGD, BRL and MXN. 

Levels vs history: Implied vol is at the low end of its one-year range, while the gaps between implied and realized vols and also risk reversals are around the 50-75th percentile. 

Skew: KRW, RUB and BRL have high skew and high skew-to-vol (call spreads offer attractive discounting for dollar bullish views). We think skew is cheap in the CEE and CNH and SGD. 

Convexity: Butterflies are expensive in KRW and cheap in ZAR, in our view. 

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest