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The combination of a Fed overlooking benign core inflation, rising core yields and adjustment of ECB policy is nonetheless likely to constitute a mild tightening of financial conditions for EM, which warrants adding to bearish FX positions, which we do via JPM’s UW ZAR in the GBI-EM Model Portfolio, complementing our existing long vol positions in Russia (08-Dec-17 USD/RUB calls of 59 strikes).
USDRUB is up about 1.15% to 60.0896, while EURRUB rose 1.27% to 68.1805 while articulating.
For now, the spot long USDRUB trade recommendations are not encouraged, for a profit of 4.15% (including negative carry).
Oil prices have stabilized, the CBR is less eager to cut the policy rate as aggressively as previously thought, and geopolitical headlines are turning more neutral and could improve further with the Trump/Putin meeting this Friday.
Risks remain tilted toward modest further RUB depreciation, but with negative carry we believe the majority of PnL has been extracted from the trade.
We continue to hold a USDRUB appearing call spread (initiated in the recent past) as a tail risk hedge on our long high yield exposure in MXN, TRY, and ZAR. The appearing call spread was opened at 1.23% and is currently at 2.40%.
Take advantage of high skew Negative carry is quite punitive in forwards (-75bp/month), so cost-effective option exposure is a good alternative. Shorting the RUB in volatility space seems to be very expensive: implied vol is one of the highest in EM and risk reversals are the highest. The skew-to-ATM volatility ratio has been rising steadily since early 2016, likely related to investors hedging bullish RUB price action. These volatility parameters favour structures that sell topside skew to cheapen up bullish USDRUB exposure.
