FxWirePro: Dollar’s Softness And FX Derivatives Trades

The US dollar has recovered some of yesterday’s losses overnight but it is still close to recent lows against both the euro and sterling. The pound while strong against the dollar is still close to its recent trading lows against the euro as further news on UK-EU negotiations are awaited. Meanwhile, US Treasury bond yields edged up yesterday as markets anticipated both tomorrow’s announcement from the Fed and the possibility of further US fiscal stimulus.

The US Federal Reserves’ latest monetary policy meeting starts today with the result set to be reported tomorrow evening. Meanwhile, discussions continue in Washington over another fiscal stimulus package. Republican Congressional leaders revealed their proposals yesterday but they still seem someway from agreement with the Democrats. The talks are given added urgency by the fact that Congress is supposed to recess for the summer at the end of the week and that some previous fiscal stimulus measures are set to soon run out. 

USD bears can achieve correlation discounts via dual-digital structures where strikes are chosen on the risk-on side of the skew, like AUDUSD up, NZDUSD up.

We see value in short front-end strangle / long longer-end straddle strategies on EURUSD, USDJPY and USDPLN.

At spot reference: 105.608 levels, we advocate buying USDJPY a 2M/2w 106.500/102 put spread (vols 8.25 vs 7.14 choice), we would like to maintain the ITM long leg with the diagonal tenors on hedging grounds.

Alternatively, shorting USDJPY futures contracts of mid-month tenors have been advocated ahead of Fed monetary policies, on hedging grounds, we now like to uphold the same positions as the underlying spot FX likely to target southwards up to 103 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Lloyds & JPM