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The US dollar was unable to benefit on a sustainable basis from the prospect of a truce in the trade conflict between China and the US. We find that hardly surprising as we assume that the inflation risks in the US would rise all the more notable, the stronger the protectionist measures turned out to be which the US administration was to implement. Rate expectations would have to rise more notably, as we are convinced that the Fed might overcompensate for the rising inflation expectations so as to fulfill its mandate of price stability.
Amid this scenario, USD calls are cheap relative to spot retracement headroom in CNH, and to a lesser extent ZAR and gold. 6M-1Y EURUSD vols are decent buys amid broad USD strength and re-emergence of political risks (Italy).
Best value USD calls: Judging from the number of queries on the topic recently, real money investors are increasingly beginning to devote option premium to hedge against a continuation of the dollar rally.
To this end, above nutshell presents a simple relative value screen for short-dated one-touch (OT) USD call options that provide highly leveraged exposure to dollar strength.
The rich/cheap measure for directional (not delta-hedged) options used in the table is the ratio of spot-strike distance of 2M 5X geared (i.e. 20% price) OTs deflated by the maximum retracement headroom for the dollar since the onset of the USD downtrend in mid-December; smaller the ratio, less the heavy lifting required of spot to trigger the maximum option payout.
Currency Strength Index: FxWirePro's hourly USD spot index has shown -82 (which is bearish), while hourly EUR spot index was at 72 (bullish) while articulating at 10:13 GMT. For more details on the index, please refer below weblink:
http://www.fxwirepro.com/fxwire/currencyindex
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