The Indian rupee continued to drag its initial losses to Rs 66.85 against the US dollar in late morning deals on sustained bouts of dollar demand by importers and banks amid lower local equities. The domestic currency opened lower by 66.80 as against yesterday's closing level of 66.71 per dollar at the Interbank Foreign Exchange (Forex) market.

INR vols sliding to record lows are inviting conditional spread trades INR vols are collapsing to all-time lows, driven by remarkably sideways price action in spot for the best part of the year.

We call for a continuation of this pattern of subdued spot regime, as portfolio inflows have returned, the FCNR deposit redemptions are far from causing the price swings that some had feared, and the currency is fairly insulated from US elections fallouts in terms of trade tensions.

This suggests that the case for buying outright USDINR vol is not straightforward – in fact, we sold 3M ATM to fund our long EURINR vega as explained above. In directional space, the cheapness in EURINR vols is now standing out relative to EURUSD, given the tight correlation between the two pairs.

Thus, while the realized beta between EURINR and EURUSD returns is 0.7, the implied beta derived from isopremium put strikes is much steeper at 1.24 (see above chart), thanks to this combination of low vols and steeper FX carry.

In fact, INR calls vs USD calls are a standout combination on a ranking of such conditional trades (see above table), and a similar pattern exists between cheap INRJPY calls vs rich USDJPY calls.

Hence, we advocate initiating longs in a 2M EURINR 73 put, funded by shorting a 1M EURUSD 1.0850 put, in equal EUR notionals. The strike in EURUSD is chosen in a slightly aggressive so as to return a positive premium inception, which we will lock in in the base case scenario where both legs expire out of the money.