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The low realized vol and technical support suggest RKO put, INR volatility lies in the low vol bucket in the EM space (3m vol is trading below 6) but realized vol has remained constantly lower than implied vol since start 2016.
The market is, therefore, pricing a premium not justified by the volatility of the FX rate.
This suggests selling volatility, and our USDINR bearish view combined with a strong technical support makes an RKO put attractive.
While the skew oriented to the topside won’t provide an extra discount to the premium, such a positive skew indicates that market volatility should fall as the spot goes lower.
A glimpse through fundamentals: The INR surged to a 6-weeks' highs against the USD, as record gains in equities boost up buoyancy about foreign fund inflows, even as caution prevailed ahead of the outcome of the US Federal Reserve’s policy. The USD dropped against major counterparts post the Fed’s monetary policy meeting. The US central bank maintained status quo in its benchmark rates as widely anticipated. However, the Fed restated on economic growth and a solid recovery in jobs market. As a result, it prompts the December interest rate hike alive.
The Federal Reserve last night left interest rates unchanged at 1-1.25%, as expected. There was no press conference or update of economic forecasts. The press statement was largely unchanged: it sounded a little more upbeat about recent economic developments, while still acknowledging some concerns about low inflation. A December US rate rise is still likely, even though it was not explicitly signaled. The US President Trump is due to announce the next Fed Chair at 19:00GMT. His pick is expected to be Jerome Powell, who is a current Fed Governor, and would represent continuity in monetary policy. Powell is scheduled to speak at an event today.
There is minimal uncertainty remaining but by and large the matter seems to have been decided. Powell is unlikely to face considerable adversity in the Senate where Trump’s candidate has to be confirmed.
Trade execution: Buy USDINR 3m put strike 65, knock-out 63.50 Indicative offer: 0.21% (vs 0.49% for the vanilla, spot ref: 64.61).
The risk is limited to the extent of premium paid. The option will lose the premium paid if it doesn’t end below the strike (65) or touches the knock-out barrier (63.50) at any time during the life of the option.
