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The US election race is on and the dollar clawed back some losses as the US-China trade deal optimism faded, setting the EM currencies on the back foot and the Fwd election vols hedges back in the action.
Even after the September 15-vol jump in overnights pricing of the US 2020 election all the way up to 35-vols, USDJPY election vol strikes us as still a good value considering:
a) 20-vols of upside,
b) The level of potential political noise and the corresponding election tail risks that await next year and
c) The liquidity constrains that plague other candidates.
1Y3M fwd vols in yen and yen crosses are an attractive low management and wide net (catch all) risk-off hedge. The optically notable rolldown to the 1Y spot vol is less relevant since the 1Y options do not account for the Nov event risk yet. The above chart reinforces that notion. Even after the uptick amid emergence of the impeachment noise yen and x-yen 1y1y fwd vols remain near the multi-year lows.
We recommend 1y3m fwd vols for snug hedging of the US 2020 election risk and added sensitivity to the event risk:- 1Y3M USDJPY FVA @8.35/8.85 indicative. Courtesy: JPM
