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We see further 10% downside for the dollar from here. EUR strength should support the NOK and SEK, while global growth should support the AUD and CAD.
EM currencies rely more on carry for returns. But valuations aren’t yet demanding and the growth backdrop offsets gradual Fed rate hikes. The PLN and CZK are our picks among low-vol EM currencies, and we think the MXN, TRY and ZAR look cheap.
Along with the above-discussed EUR/EM constructs that take advantage of high carry-to-vol, with the Fed in a slower gear than the markets expected here we widen the net by employing no-touch structures as a passive play on limited upside in high beta FX.
No-touches can be seen as defined downside alternatives to selling naked vanilla high-beta & EM puts and are well suited to take advantage of the modestly risk-positive environment that should emerge after the trade dust settles.
The 1st chart ranks 3M high beta structures with barriers set to 1-sigma away from the spot (arbitrary condition but sets pricing of different pairs on similar footing and strikes us as a sensible barrier selection). No-touches take advantage of elevated fwd points, vols, and skew.
Effectively vol selling structures, no-touches are inherently low leverage trades, as is the case for other income harvesting strategies (e.g. vol, carry and vanilla selling).
The above chart demonstrates the back-testing buying of no-touches relative to selling vanilla USD calls/EM puts for a basket of 10 USD/EM pairs and outlines the capped downside advantage of NTs during the dollar rallies, that makes NT performance d risk-reward characteristics favorable.
Given the constructive view on USDBRL and USDRUB and favorable pricing consider: Buy 3M USDBRL call no-touch with barrier @3.400, the level not breached since Dec 2016, costs 39.5 %USD.
Buy 3M USDRUB call no-touch with barrier @59.00, the level not breached since last Dec, costs 45 %USD.
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