FxWirePro: Wait Amid Covid-19 Threats Or Asian EM Carry Trades Via Put Spreads

The wide dislocations as observed in the market might also imply an elevated reward for embracing long-risk trades. Possibly, keeping in mind the liquidity issue in vol space as mentioned above, one takeaway from the filtering analysis would be to wait until market conditions stabilize before looking at fading any residual risk premia by then. 

Otherwise, long risk trades should better be expressed via structures whose downside risk is well defined at inception. One such case could be via EM Carry trades via put spreads. While our EM strategy team remains extremely conservative towards EM, as COVID-19 starts to take its toll on global growth, the generally mild pricing of Asian riskies, excluding KRW, makes long Carry trades expressed via spreads historically attractive (refer above chart). This is particularly the case in the Asian space, where risk-reward for such trades is positively skewed, especially for cases like USDINR, EURINR and EURCNH. 

USDCNY hitting 7.10 level has been hyped for a few times over the past weeks. Yesterday, we again saw that the magic of 7.10 mark - USDCNY touched as high as 7.13 in the morning session but closed as low as 7.08. If we extend the time horizon, this specific level seems to be gradually forming since 19 March. In the meantime, we could also see that the USD-CNY has closed below 7.10 during most of the trading days, which means that the CNY mostly closed stronger than 7.10 versus the USD. I think many would agree that there should a magic hand behind this magic number - PBoC seems to set a tone for the market for the time being.

Consider: 3M ATMF/ATMS put spread on USDINR at USD 1.5% (off spot reference: 75.3, fwd 77.88).

1y ATMF/ATMS put spread on EURCNH at EUR 1.4% (off spot reference: 7.8365, fwd 7.97). Courtesy: JPM