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FxWirePro: Bidding USD/KRW call ratio spread of Christmas expiries while Black-Friday shopping of low vols and high skews

A full belly doesn't like to study, the same applies to the FX market. As a result, the trading in USDKRW has been very tepid as the traders in New York still seem to be digesting their Thanksgiving and in the mood of Black-Friday - just like all the FOMC members probably are. Many will also stay away from their trading desks today so that momentum in USD is likely to be in short supply.

Nevertheless, KRW strengthened considerably in the recent past (about 3.18% versus USD in last two weeks).

The rate hike expectation in South Korea has triggered the recent sell-off in USDKRW.

However, with an increased focus on repricing and reassessment of DM interest rates and monetary policy, G10 FX forecasts have had more revisions than EM FX forecasts in the past month.

The FX street seemed to be overweight in EM even as the recent rise in US yields has prompted a larger-than-usual response. Conditions for a larger, more sustained USD rebound remain unmet, the forecast revisions in the past month are idiosyncratic and mixed versus the dollar, but projections for broad directionality of the USD remain unchanged.

More noticeably, yesterday’s FOMC Minutes are almost universally interpreted as implying that a December rate hike is a ‘done deal’ but the longer-term outlook is ‘dovish’.

We could foresee bullish risks in the dollar on account of a) Inflation convincingly bounces back, further validating the dots; b) Feds’ hiking cycle most likely to continue c) Rest of world normalization is depriced.

Hence, at any cost, the pair may bounce back, especially, on the eve of Christmas. Subsequently, we emphasize buying Dec-22 USDKRW 1x1.5 call ratio spreads in this write-up, using strikes at 1090 /1110, indicative offer: 0.28% (vs 0.65% for the 1090 strike, spot ref: 1085).

Max leverage: 5 times of shorting the topside strike in 1.5 times the notional of the near leg provides a 55% discount on the 1090 call strike. A full reversal of the past two-month performance is required before there would be negative P&L.

Investors could also consider a 1x2 call ratio: the discount to 1090 call strike rises to around 70% and maximum leverage to 8.5x but the level at which the trade starts experiencing negative P&L is much lower (1128).

Low vol and moderately high skew Short-dated volatility parameters are conducive to position for a limited (2-4%) correction.

Vol: One-month implied volatility is at the lowest level since 2014 while the premium of implied over realized is at its two-year average (refer above chart).

Skew: Risk reversals have compressed alongside easing in North Korea tensions and the move lower in the spot, but selling topside is still the most advantageous versus regional peers.

The maximum loss is limited to the extent of the premium paid below 1090 and unlimited above 1144.

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2017-12-18 08:05:21
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2017-12-18 08:01:28
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2017-12-18 08:00:58
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December 18 09:00 UTC Released

ITGlobal Trade Balance*

Actual

4.953 Bln EUR

Forecast

Previous

3.99 Bln EUR

December 18 09:00 UTC Released

ITTrade Balance EU*

Actual

0.666 Bln EUR

Forecast

Previous

0.469 Bln EUR

January 9 11:00 UTC 3179431794m

BRRetail Sales MM*

Actual

Forecast

0.35 %

Previous

January 9 11:00 UTC 3179431794m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3179431794m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3179431794m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3179431794m

BRRetail Sales MM*

Actual

Forecast

0.35 %

Previous

January 9 11:00 UTC 3179431794m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

December 12 09:30 UTC 86178617m

GBRPIX YY

Actual

Forecast

Previous

4.2 %

December 12 09:30 UTC 86178617m

GBPPI Input Prices MM NSA

Actual

Forecast

Previous

1 %

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