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The market had been rattled again as media reported that the Trump administration is considering a ban on Chinese companies' listing in the US stock market. On the other hand, Brexit concerns are still lingering as the optimism for the UK economy fell 5 points to ‑10%, the lowest since June 2016 when the survey was conducted in the immediate aftermath of the referendum, GBP OTM vols are luring for further Brexit delay and Sterling’s knee-jerk higher. Firms in the manufacturing and services sectors reported the weakest overall business confidence and highest Brexit concerns.
When we deep dive into the results of some FX hedging survey to foresee as to how the funds are making opportunities and mitigating risk in the overseas markets. We could also sense the downward trend in the global growth which is expected to continue through to early 2020 as the US-China trade dispute and other factors continue to weigh in. This is quite evident in
good Chinese PMIs offset by the hush-hush about the US plans for capital restrictions.
While the FX vols stay on side-lines while uneasy calm persists as USD correlations drop below 40% for the first time since 2016.
An eye popping vol carnage dominated the FX vol space in September as risk sentiment turned around after the challenging August. The Aug spike got halved. VXY-GL term structure shifted lower (refer 1st chart) and the 3M tenor is now only 1 vol above the July multiyear low with the implied – realized gap at 1.2vols still weighing on FX implied vols.
Amid the vol sell-off delta-hedged straddles broadly succumbed (refer 2nd chart), but it is the breath of the long gamma MTD suffering that gives one a pause. Septembers seasonally tend to be one of the softest vol months and the current September proved that point. That said, the oil shock over the weekend still has potential to upset that bearish September FX vol stance even though the FX spot and vol reaction so far has been fairly contained.
Potentially a bad omen for FX vol shorts, USD correlations dropped below 40%, first time since 2016 (refer 3rd chart).
We are closely watching for signs of a mean-reversal higher which is not a question of if but of when. Such reversals have been historically associated with upticks in USD vols.
The question is whether there are still FX vol pockets where a short vol expression is plausible. Amid the overall backdrop we are inclined to tactically and selectively harvest risk premium only in safe pockets of oil isolated EM and with the longevity of such short vol stance highly uncertain we prefer limited downside structures, we discuss them in our upcoming write-ups. Courtesy: JPM & Commerzbank
