x
Visit our new Mobile Website next time you access NetDania with your mobile device
Netdania News
FxWirePro: A Glimpse At G10 FX Options Market In H2’2020

Source FxWire Pro - Research & Analysis Friday, 3 Jul, 2020 07:37:20 GMT
Back

The above nutshells showing IVs and risk reversals of G10 pair, where implied volatilities are turning lower and you could also make out that there has been bearish hedging sentiments for dollar except USDCHF.

The FX option markets appear oblivious to this unusually high degree of unpredictability. On JP Morgan’s workhorse cyclical model of FX vol, current levels of VXY screen 4 pts+ too low (3-sigma misalignment – refer 1st chart). We caution against taking this massive undershoot at face value however, since much of it is driven by recessionary levels of PMI and abnormally elevated forecast uncertainty around key economic variables such growth, inflation and unemployment as flagged earlier, both of which should normalize in coming months as economies reopen from lockdowns and visibility on Covid damage improves. Also, the disconnect between manifestly poor macro conditions and unfazed asset markets is hardly a FX vol-specific phenomenon; if core asset markets in the eye of the storm such as equities and credit can remain persistently misaligned vis-à-vis growth / default risk fundamentals thanks to Fed intervention, currency vol can hardly be expected to be the ground zero for a major macro vs. market realignment. At a minimum though, the vol vs. macro setup suggests that a high degree of caution is warranted around short volatility trades, since the outsized fear premium of 1Q’20 has long become history. Not to mention that sub-par liquidity in these challenging market conditions raises the bar for short risk premium trade constructs.

The most obvious counter to this cautious view of risk is that Fed fund rates have fallen to zero, as have other DM policy rate targets. There is a legitimate case to be made that with policy interest rate differentials collapsing in the wake of synchronized rate cuts across G10, current carry-to-vol ratios are already too high, and therefore FX vols do have room to fall once the dust settles on Covid.

Nowhere is this disconnect starker than in the case of USDJPY risk-reversals – the one currency pair that has historically co-moved the strongest with rate differentials, and where historically stretched skew / ATM vol ratios are at severe odds with near-zero interest rate carry on forward delta hedges. Indeed a formal econometric model linking FX vol to interest rate vols and correlations between them finds the former to be meaningfully overvalued (refer 2nd chart), though this observation is undercut somewhat by the counter that on different cross-market variables such as equities, VXY has substantial catch up room higher. Net-net, this push and pull of offsetting factors leaves the directional FX vol view for H2 somewhat murky, and is a microcosm of the indecision hobbling investors from enthusiastically embracing the reflation rally in other asset classes. The current environment strikes us as a poor one for making a cavalier macro-directional call on volatility. We will look to keep risk fairly tightly controlled in our trade recommendations, prioritize relative value over outright vol longs or shorts, and attempt as best as possible to embed a degree of long vol protection even in RV constructs. The rest of this note outlines some key FX option themes around which we will try to organize our recommendations in coming months. Courtesy: JPM

Source: FxWire Pro - Research & Analysis
© FxWire Pro 2020. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.
Find a Top Broker
Global
Forex
27872.75
-85.79
-0.31%
3373.43
-1.94
-0.06%
11175.24
49.83
0.45%
11491.72
-72.61
-0.63%
12952.33
-127.82
-0.98%
23240.52
28.97
0.12%
3320.73
1.46
0.04%
6176.78
-100.19
-1.60%
25175.93
-195.78
-0.77%
6095.57
-86.74
-1.40%
11300.45
-7.95
-0.07%
1943.49
21.71
1.13%
44.95
-0.355
-0.78%
1.17989
0.00048
0.04%
107.046
0.204
0.19%
1.30536
0.0008
0.06%
0.71440
-0.00202
-0.28%
1.32283
-0.00146
-0.11%
126.30400
0.293
0.23%
0.90386
-0.00017
-0.02%
139.73200
0.347
0.25%
0.91077
-0.00106
-0.12%
1.07462
-0.00082
-0.08%
0.65450
-0.00316
-0.48%
93.28100
-0.162
-0.17%
Top Gainers
Name
Last
+/-
%
1.60
0.97
155.96%
7.55
4.02
113.88%
12.02
3.26
37.16%
0.73
0.18
32.69%
125.65
27.94
28.60%
0.09
0.02
26.52%
3.02
0.55
22.31%
3.88
0.68
21.09%
3.26
0.55
20.30%
13.24
2.11
18.96%
Top Losers
Name
Last
+/-
%
0.08
-0.04
-32.78%
0.56
-0.26
-32.12%
2.00
-0.67
-25.09%
0.58
-0.17
-22.66%
12.56
-3.44
-21.50%
0.33
-0.08
-20.12%
1.23
-0.30
-19.61%
1.19
-0.27
-18.49%
6.57
-1.40
-17.57%
2.88
-0.60
-17.24%
NetDania does not guarantee the accuracy of data contained on this website, nor do we guarantee that data is real-time. Data on this website may be provided from OTC market sources and market makers, and not necessarily from exchanges. The provided price data is indicative and may not be appropriate for trading or decision making purposes. NetDania does not assume any responsibility for any losses incurred from the use of the provided data.
NetDania does not endorse or promote any broker or financial service. NetDania is a pure technology provider offering its software with broker integration. Any user of NetDania software must be an existing client of one of our supported brokers. NetDania showcases NetDania technology for the purpose of demonstrating it towards brokers and other institutions looking to white label the technology on a software subscription contract. No financial services are offered, promoted or recommended. NetDania is compensated as a technology provider by its institutional clients including its integrated brokers. It is the sole responsibility of any recipient employing or requesting an offering to comply with all applicable legislation or regulation affecting it.

Persons or entities including approved brokers not belonging to the NetDania Group may advertise on the NetDania and its Group’s websites, through links, banners or otherwise. We have not taken any steps to verify the accuracy, quality or reliability of any products, information or services provided by third parties that have links on our website. We accordingly provide no warranties with regard to and disclaim responsibility for any such products, information or services and exclude all liability in this regard to the fullest extent permitted by relevant laws and regulations. If a user of the NetDania Group’s websites decides to act upon any such advertising, such user does so entirely at its own risk.

NetDania’s website may be accessed worldwide. The Information provided on its website is however only intended for use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. None of the offerings services referred to on this website are available to recipients residing in countries where the provision of such offerings would constitute a violation of mandatory applicable legislation or regulations. It is the sole responsibility of any recipient employing or requesting an offering to comply with all applicable legislation or regulation.

HIGH RISK INVESTMENT WARNING:
End-users of the NetDania software that make use of the trading integration features as direct clients of integrated brokers, should be aware of the level of risk carried by trading in financial markets. Trading foreign exchange and or other financial instruments on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or more of your initial investment, and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading, and seek advice from your broker and or an independent financial advisor if you have any doubts. Anyone opening a live trading account needs to adhere to the laws of their local country as such laws may differ from country to country.
NetDania expressly disclaims any liability for any lost principal or profits which without limitation may arise directly or indirectly from the use of or reliance on information on our website or the use of our software with broker integration.
Copyright © 1998 -2020 NetDania Creations ApS, Bredgade 30, 1st floor, DK-1260 Copenhagen K, Denmark, +4536980409, Contact NetDania by email, CVR-nr.27976670 Terms And Conditions and Privacy Policy