FxWirePro: Strategic stances in tactical defensive G10-FX vol

Recently FX volatilities across the board fell to exceptionally low levels. In such an environment jumps in exchange rates become more likely. And indeed we are currently observing increased jump intensity. This spot market behavior should quickly erode the low-vol environment. Winners should be classical safe havens like CHF and JPY.

The recent G10 FX vols slump brought the VXY-G7 level to only 0.5pts from the 2014 historical low. With G10 FX vols dropping by more than 1pts, April soft FX vol seasonality has been confirmed yet once again, though perhaps less impressively since it came within the YTD vol bear trend. 

The mean of the last two decades of April/May VXY profiles suggests a rebound after the seasonally soft April (refer 1st chart).

Yen vol seasonality and its spillovers are considered the main culprit behind the broad FX vol basket seasonal behavior.

The premise that got questioned this year amid an anecdotally low level of hedging activity out of Japan. 

G10 FX front vols were broadly priced in the single digit percentiles mid-week (on the 1-year look back). 

The vol slide paused since last week and jittery FX spot markets provided
a helpful hand to FX gamma. 

2/3rd of the G10 3M delta-hedged straddles are in positive on w/w basis. With no
obvious catalysts and amid improved growth expectations FX vols may struggle on the way out from these depressed levels.

That said, vol is seasonally firm in May and EM FX started to show some cracks. Our macro analysts expect the dollar to strengthen further and very likely test

the 2018 highs and perhaps even the 2016 highs.

If FX spot starts to break out from the recent tight ranges we are bound to see a more broad-based repricing of the FX vols. While we are not finding any meaningful historical trend around the Golden Week for yen vols and cross-vols (refer 2nd chart) the fresh memories of the January flash crash may help spur tactical yen vol demand. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly JPY spot index is inching towards 12 levels (which is mildly bullish), and hourly USD spot index has bearish index is creeping at -129 (highly bearish) while articulating (at 10:50 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex