FxWirePro: Quick Run Through On Macro Backdrops & FX Options Positioning

Markets have begun the Q4’2020 with a positive note but seems to be quite apprehensive, during the prevailing consolidation phase, remaining very focussed and reactionary to headlines about Covid-19 pandemic, the state of President Trump’s health (newswires suggesting he may be released from hospital as early as today), along with stimulus measures in the US. The dollar index appears to be weaker with the mixed bag of news flows.

Meanwhile, the pound remains focussed on Brexit headlines, with the video conference over the weekend between the UK’s Johnson and EU’s von der Leyen ending with both tasking their negotiators to work intensively to see if a trade agreement can be reached by the end of the month.

As Covid-19 cases continue to rise, the apprehensions for markets is a further tightening of restrictions and can have the adverse impact on economic activity. Recent data has highlighted a slowdown in the recovery since the easing of lockdowns in the summer.

Today’s domestic data calendar is limited to the final estimate of the September UK services PMI. The ‘flash’ estimate showed a robust outturn of 55.1 but down from the 58.8 outturn recorded in August, pointing to a slowdown in the rate of growth in September. We expect the final reading to remain consistent with solid growth across the sector.

However, we are forecasting a modest downward revision to 54.8 on the basis that later returns to the survey will reflect the impact of the latest round of lockdown restrictions that were announced after the cut-off date for the ‘flash’ report.

While FX options have begun re-allocating greater event risk premium from US Election Day proper to the 1-3-weeks period after to account for the possibility of a contested outcome and/or delay in ballot counting.

GBPCHF puts continue to be the most economically priced no-deal Brexit hedge. Flies are generally cheap vs. ATM vols across GBP-cross surfaces as low-delta GBP call vols are depressed. 25D GBP puts in EURGBP are rich across the curve, consider spreads vs. 10D strangles to earn smile theta with defined risk. Courtesy: Lloyds & JPM

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