FxWirePro: Why and how Sterling's gamma ownership lures us?

Asymmetric uptick in G10 vols is more difficult to envision, since the mix of Fed repricing and tax reform optimism may draw a soft floor under the greenback for the time being even if this week’s upturn does not repeat, and coupled with the somewhat panicky unwinding of Euro (and other European FX) longs might leave macro investors less willing to spend option premium to play for EUR resurgence.

In this situation, if one had to pick one Eurobloc currency to buy vol in, our preferred pick would be GBP, especially on the crosses.

We continue to believe that the abrupt shift in BoE policy and the attendant possibility of a policy mistake make sterling a fundamentally more uncertain currency than many others.

This is evident when we consider Mr. McCafferty voted for an immediate rate rise at the last meeting, while Mr. Haldane is one of the majorities on the Committee biased towards favoring a hike. Chatham House rules apply at Mr. Haldane’s event, so we may have to wait for his appearance tomorrow for insight.

The range of spot outcomes on cable has now opened up from a previously narrow 1.28-1.30 band to a much wider 1.28 - 1.36 (or higher) which ought to command a higher premium in implied vols than before.

Yet GBP implied vols have retraced 3/4ths of the ramp up from earlier this month and realized vols are recently clocking 1 vol above short-dated implieds, hence this appears to be a case of underpriced fundamental uncertainty with supportive technicals for gamma ownership. Courtesy: JPM