USDSGD 1M 25D risk-reversals: USDSGD 1M 25D risk-reversals are at multi-year lows (see chart), around levels that prevailed ahead of the Brexit vote in June.

The spot-vol correlations should remain high and positive in USD/EM pairs irrespective of the outcome of the elections (i.e. spot and vols both higher if Trump wins, which does not seem to be factored into current depressed skew levels, hence risk-reversals should act as convex hedges from here.

We are however acutely aware that –

a) SGD NEER is at -55bp within the band, as opposed to +150 bp earlier this spring i.e. the strong asymmetric bias of SGD to weaken within the band has diminished; and

b) The crowded SGD shorts are quite visible, which can have the effect of dampening the volatility of the currency to an event shock next week (see tepid IVs of ATM contracts).

In other words, there are factors at play that can mitigate spot-vol correlation in this instance; hence instead of a pure vol construct (i.e. delta-hedged), it is preferable to run with a live (i.e. delta-unhedged) risk-reversal as a directionally bullish dollar play that can benefit from generalized Asian FX stress stemming from a Trump victory.

Moreover, the medium-term balance of risks for USDSGD has shifted to the upside as the advance quarterly GDP prints of the US has increased recently, while the GDP in Singapore has been contracted 4.10 pct in the Q3’2016 over the previous quarter.

Observing market pricing Fed hikes in December, while the benchmark interest rate in Singapore was last recorded at 0.38 pct and other underlying factors, we foresee further upside risks upto 1.4080 and 1.4240 cannot be disregarded.