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CAD option risk premia appear oblivious to the fallout of this high stakes standoff, perhaps because of the comatose state of currency markets at present. EURCAD risk-reversals, in particular, appear too complacently priced: at zero across the curve, they are well discounted to already low USDCAD risk-reversals (3M 0.35, 1Y 0.7), and underpriced relative to even tepid recent realized spot- vol correlations (SABR implied 6M spot-vol corr. in EURCAD r/r 1% vs. trailing 1m spot-vol corr 15%). Aside from the flatter term structure that helps to extend option tenors without incurring much roll cost, the principal advantage of EURCAD riskies over USDCAD is their substantial positive carry when bought in delta-hedged format.
Unsurprisingly, the source of this carry is elevated Euro forward points: close-to-zero risk-reversals incur very little time decay on a naked basis, while the forward delta- hedge (short EURCAD forward) earns substantially more interest rate carry. The net result is that delta-hedged EURCAD riskies are meaningfully positive carry instruments, in contrast to USDCAD riskies that incur both negative smile theta and negative points carry on the delta hedge on account of higher US rates than Canada’s.
Since high Euro points are the principal driver of this carry advantage in EUR-cross risk-reversals, the skew vs. forward carry disconnect exists to varying degrees across the entire EUR/high-beta FX universe and is not limited to EURCAD; the latter only stands out on valuation screens because of their eye-catching depressed skew levels (refer above chart). The chart displays that EURMXN riskies are also almost equally well-priced, and present an even bigger skew vs. forward point disconnect than EURCAD; they can be particularly useful overlays on Mexican bond longs that are well represented in most global bond portfolios. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at 65 levels (which is bullish), while EUR is at -33 (mildly bearish), hourly USD spot index was at 83 (bullish) while articulating at (12:43 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
