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FxWirePro: Glimpse At Pandemic Equity And FX Derivatives Cues
Some further positive news overnight, with the WHO suggesting that countries that took measures two to three weeks ago should see stabilisation soon (those signs potentially being seen in pockets of Europe, particularly Italy) and Chinese PMIs rebounding much more than expected, with both manufacturing and services printing above 50, into expansion territory. UK, European and US data is still in ‘catch-up’ mode in regards to reflecting the effects of Covid-19, with the Lloyds Business Barometer in March sliding to 6 from 23 level.
That said, FX markets today are going to be dominated by month/quarter end flows – USD buying expected. Meanwhile, equity markets are still reflecting the more positive statements.
While the fiscal and monetary bazooka as announced during the week helped in setting a risk-on tone for markets, leading to a sharp drop of FX vols. Especially, by the Fed and ECB this week and later supported by the developments on emergency aid package triggered a sharp reaction by equity markets. US Equity Indices rallied by more than 15% in a matter of days.
We highlight that both convexity smile risk pricing and a tactical model for FX vol trading still point to most risk-averse trading conditions on record.
We see value in forward volatility in CEEMEA, on the back of lower vols and inverted curves. Long-risk trades are favored via fixed-downside structures, such as ATMF/ATMS spreads in Asia.
RV measure comparing implied correlations with skews finds value in dual-digi structures where USD rises vs. EUR, GBP and drops vs. XAU, JPY, CHF. Courtesy: JPM & Lloyds bank