FxWirePro: Options Spreads, Vols and Risk-Reversals Among NAFTA FX-bloc

As FX option markets enter into 2Q’19, we see some signs of life in EM where idiosyncratic macro stories have begun to re-emerge (TRY, BRL) and select satellite European currencies (NOK, SEK, HUF) that are proving more responsive to persistent European growth malaise than the Euro itself (refer above chart).

The two pockets that continue to remain stubbornly comatose are G3 and Asia FX. The surfeit of liquidity in the underlying spot in the former has always been the Achilles heel for vol buyers, which perhaps explains why Euro vol ownership has proven to be a frustrating endeavor over the past two decades except for brief periods around the GFC and the European debt crisis.

NAFTA bloc vols and risk-reversals can jump, if we are correct that a standoff between the Trump administration and the Democrat-controlled House around the issue of USMCA ratification is higher odds than the market gives it credit for. 

The CAD risk premia section below flags that owning EURCAD and EURMXN risk-reversals are good value hedges against a NAFTA accident.

CADCHF 6m IV skews are stretched on either side (both OTM calls and OTM puts are having equal demand), which means hedgers’ sentiments are positioned for both downsides as well as upside risks. While the same has been the case with USDCHF, both OTM calls and puts are on higher demand. 

We revise MXN slightly stronger in 2Q and 3Q’19 given recent evidence that short USD positions are less likely to be unwound on fiscal concerns alone.

We add longs in MXN puts with KO = 18.5 (spot reference: 19.079 levels). 

We also continue to be positioned short CAD via a long-held CAD put/CHF call vs. USD put/CHF call option spread (spot reference: 0.7550 levels).

Stay long in 6M 0.70 CADCHF put option vs short 6M 0.9450 USDCHF put at zero cost (spot reference: 1.0202 levels). Courtesy: Sentry & JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -87 levels (which is bearish), while hourly USD spot index was at 80 (bullish) and CAD is at -24 (mildly bearish) while articulating at (09:09 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex