FxWirePro: Tour on KRW-CNH-INR options triplets

The KRW has struggled and failed to get any sort of cushion from the inter-Korea summit this week. KRW weakened yesterday, a reflection of a strong dollar last Friday and renewed trade tensions between China and the US. South Korean President Moon Jae-In is holding a summit with North Korean leader Kim Jong-Un in Pyongyang this week, which is the first such visit by a South Korean leader in 11 years. However, the enthusiasm on the political front seems unable to dispel the trade concerns. 

On the flip side, the markets retain a "risk-on" bias, after US inflation readings came in a little softer than the consensus. The US yields came under renewed pressure, as did the USD, while equities benefitted. US President Trump, however, played down optimism about the proposed restart of trade talks with China. We won’t be astonished that foreign traders are interested in hedging the FX risks via high leveraged FX option structures amid the threats of further worsening within EM. While we emphasize that USDJPY vols and USDKRW fwd vols are recognized as worth buying ahead of the tariff decision. 

Only a throw away on the discount ranking, a KRW-CNH- INR USD basket call triplet offers a direct exposure to the region at still very solid discount (58%) to plain vanillas. Even as Asia EM vols have started to broadly firm up, USD basket call is still priced near the recent low (60bp mids for ATMS strikes). 

The KRW-CNH-INR triplet’s consistent strong performance since March and historically observed occasional bursts of positive returns that have shown tendency to achieve >7x leverage for ATMS strikes (refer above chart) make a strong case for tactically taking a defensive position in EM via a KRW-CNH-INR triplet. 

At strikes set to 1%, 0.5%, 1.0% OTMS, USD basket call of USDKRW-USDCNH-USDINR costs 34/42bp for 2M tenor and 44/54bp for 3M tenor. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -70 levels (which is bearish), while hourly CNY spot index was at 89 (bullish) while articulating at (13:41 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex