Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Trader Strategy
OTC Derivatives Trading
Summary: XAG is outperforming as the dollar continue to trade weaker. XAGUSD spot is up 8% on the week and closing in on the November highs. Vols are marked higher and XADUSD vols are the most expensive among the currencies we are tracking. We like to sell into the pickup in vol and keep a short vol position over the holidays.
Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.
USD continue to trade weaker after the FED decision yesterday with the dollar index trading down below 90. Commodity and EM currencies continue to benefit from the weaker dollar and lower real rates.
XAG is the out performer over the last days, up 8% since the start of the week. Spot is quickly closing in on the highs from the start of November and the top of the range it been trading in for the last 3 months.
Vols are trading higher after the sharp move higher in spot, 1 month is up 3.5 vol over the week to currently trading around 37 vol. XAG risk premium has increased with the higher implied vol and the risk premium is currently the highest among the currency pairs we are tracking. 1 month risk premium is trading at 5.5 vol, see bottom left graph. Risk reversal is marked higher as well with spot higher, 1 month risk reversal trades at 5.5 up 1.0 on the week.
We prefer to sell into the higher vol and keep a short vol position over the holidays. Either sell XAG calls, selling outright or as covered calls depending if you think the 26.00 resistance will hold or not, or buy ratio call spread for a break above 26.00.
Sell 1 month 28.00 XAGUSD call
Receive 3700 pips
Alternative
Buy1 month 26.50 XAGUSD in 1 unit
Sell 1 month 29.50 XAGUSD in 2 unit
Cost 4600 pips
Spot ref. 25.70
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