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In H2 2016, we would see a cease-fire in the currency war. In H1 2014 a pause in monetary policy activism caused a collapse in FX volatility.
Expect FX implied vols likely to catch up with the downside in the underlying spot (relative to rates and equity vols) regardless of UK’s decision post-EU referendum.
We reckon IVs in G10 currency pairs have been blown out of the proportion on account of UK’s decision on association with EU group.
For an instance, we’ve considered the GBPUSD divergence between IVs/HVs and risk reversals/spot FX. Same is the case with other G10 majors, such as USDJPY, EURGBP, AUDUSD, and so on.
You can trade the IV value by monitoring an IV chart for a specific underlying market for a certain time period and determine the IV range. The peaks suggest the option is expensive to buy and the troughs suggest the option is inexpensive. This information can be used when deciding which options to buy or sell. It is important to note you cannot compare the IV values of different options
We revisit the trade on a frequent basis, reversing the view if/when the Fed shows its teeth again (no hike before December is anticipated) and/or on signs that massive leverage in China leads to severe credit stress.
GBP is showing little strength against the dollar at 1.3188 levels from the last couple of days after a steep slump even if the UK decides to exit from the EU.
But we would revisit shorts in GBP trades after the referendum irrespective of the outcome. Growth is slowing regardless of the outcome and we don’t expect any BoE rate hikes in this cycle.
The current account deficit isn’t a major obstacle as long as capital inflows aren’t disturbed, but the contrast with Sweden’s huge surplus is striking.
We think of unloading weights in CAD longs to book profits of over 5% on our basket, long CAD, JPY vs USD and CHF, while maintaining shorts in GBP on hedging grounds. It’s not that we don’t like the trade but we want to express the two halves (short NZD/CAD and short CHF/JPY) separately.
The BoJ is facing strong internal resistance to deeper rate cuts, while the SNB still fights CHF strength. In a deeper period of ‘risk-off’, the yen is likely to gain sharply.
