FxWirePro: Three FX derivatives perspective – Trios to tackle low-delta, US-China trade conflict and delta-hedge ahead of FED

Last week ended 19th September saw global inflows to both equities and bonds, underscoring market-watchers’ indifference to the ongoing US-China trade barbs. The recent headline economic-related indicators post 24th September, the date when trade tariffs took effect, also indicated relative cautious-optimism as seen from Wall Street and Asian equity bourses.

As we head into the Fed the USD is holding around the summer range lows, US yields consolidate near recent highs (2- and 5- year yields set new highs since 2012 in the last week), while the S&P500 consolidates after setting new all-time highs. 

With regards to the FOMC, it will almost certainly raise policy interest rates by a quarter-point to 2.25% (most likely the upper bound of the new 2.00-2.25% range). The above driving factors are taken into considerations and below FX derivatives strategies are advocated:

1. EM FX vols appear to have peaked for now judging from the fatigued response to this week’s escalation in the US-China trade conflict, as well as technical signals that have successfully flagged local vol highs in past cycles. We recommend tactical vol shorts in EURPLN, USDIDR and AUDUSD.

1. EURCNH skews are cheap vis-à-vis USDCNH skews and carry in forward points. Fully or partially delta- hedged risk-reversals are a good value, carry-friendly hedge against further intensification of trade conflict.
2. Long-dated low-delta USD calls vs. CHF and JPY are near pre-GFC lows in premium, but without an obvious delta catalyst. 3Y-5Y expiry 10D (120 strike) USD calls/JPY puts can be considered as zero-carry long convexity instruments. Courtesy: JPM


Currency Strength Index: FxWirePro's hourly EUR is inching at -26 (which is mildly bullish), USD spot index is flashing at 143 levels (which is bullish), while articulating (at 11:39 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex