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In US, two events are engulfing dollar’s risk premia, one is Fed rate hike and presidential polls that are highly significant for US currency before finishing 2016.
What is interesting is that rate expectations have remained at low levels since yesterday. Despite the fact that the likelihood of a victory for Hillary Clinton in the US Presidential elections has risen following the first TV debate.
Of course it is quite possible that the US economy would continue to develop positively even under Donald Trump as President. However, that is far less certain than after a victory of Clinton who is generally expected to continue the politics of her predecessor (as we reported in the Daily Currency Briefing over the past two days).
Election day risk is also underpriced in EUR/high beta and EUR/EM crosses (EURZAR, EURBRL, EURNZD even EURMXN) that while not necessarily neatly tied to the US economically, are nonetheless solid bets on any election driven risk-aversion.
EURMXN is the most eye-catching of the lot given the elevated risk premium in USDMXN, and is a good relative value buy over the latter, but EURCHF seems to be shrugging off all the factors.
Elsewhere, the policy read through from the BoJ to SNB and ECB are strong, which is supportive of the view that CHF and EUR should strengthen, eventually.
This stability masks a still unstable underlying flow position in which the SNB is recycling all of Switzerland’s current account surplus though persistent FX intervention (the SNB needs to intervene because net private capital outflows are essentially zero).
We have already advocated shorts in 6-week EURJPY straddles and - USDJPY vega-neutral calendar spreads.
US election risk premium in FX options has ticked higher in recent weeks but is still within established ranges.
MXN, CAD and CNH pack in the most risk premium given their obvious trade linkages with the US, while USDKRW and EUR/high-beta options underpriced event risk.
Upon extremely higher IVs in USDMXN, we recommend initiating longs in 2 lots of 1M ATM +0.51 delta call, and simultaneously short 1 lot of ITM call (1%) with comparatively shorter expiry in the ratio of 2:1. Thereby, short term dips would be taken care by shorts and long vega calls capitalize on IVs to hedge upside risks.
We are bearish the won on valuations, fading equity flow support and potential central bank intervention, so owning pre- vs. post-event calendar spreads in USDKRW is a genuine election event risk play in our view.
Well, as the forecast shows continued tight range-trading in EURCHF between 1.09-1.10 over the 1Y horizon, we uphold shorting 1m straggles at the spot rates of 1.0888.
