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Cable outlook: Medium-term FX/rates correlation holds again; Fed will hike and MPC won’t.
Uncertainty is now about the impact of triggering Article 50, not whether or not it happens.
2m vol is undervalued by 2 vols and will pick up further if spot accelerates below 1.20.
Fast downside, cheap vol and skew suggest buying an OTM put.
The optimal strike of a 2m put is 1.16, costing 45 pips in current market conditions.
Cable approaching lows within a bearish phase Cable has been evolving within a 1.20-1.27 range since last October.
However, stepping back and considering the weekly price action instead suggests that the GBPUSD had been trapped in a wide bearish channel (refer above graph) for about one year, just when Brexit talks started to heat up in February 2016.
Cable is approaching recent lows, and our technical analysts project a possible fast fall to 1.13.
Hedging Framework:
Buy GBPUSD 2m put strike 1.16, indicative offer: 45 pips (spot ref: 1.2150)
Risk profiling: Limited to premium. Investors buying a vanilla option cannot lose more than the premium initially invested. In current market conditions, the put will likely expire in the money if the spot falls by at least 45 pips below the traded level.
