Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
OTC Derivatives Trading
Summary: USD trades lower as inflation fears fade again and USD index closing in on the year-to-date lows. USDCNH has traded down below the 6.4000 level for the first time since 2018 and vols have been paid up sharply over the last days and frontend risk reversals have flipped to trade for USDCNH puts.
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 trades lower as inflation fears fade again and the dollar index closing in on the year-to-date lows. CNH spot trades stronger with US 10y down below 1.60 and CSI300 up over 3% today. USDCNH spot has traded down below the 6.4000 level for the first time since 2018 and the market is ready for a move lower, low from 2018 was 6.2360.
USDCNH vols are sharply higher today with 1 week up almost 1 vol and 1 month up 0.4. The risk reversal has flipped over to trade favor the downside in the frontend, 1 month risk reversal now trades 0.15 for USDCNH puts compared to 0.2 for calls yesterday.
Even if vols are higher over the last days we still trade below year-to-date average and we see vols to initially trade higher if spot can stay below 6.4000. We think put spreads or time spread where you for example buy 1 month and finance it by selling 1 week offer good value for lower USDCNH trades and both strategies take advantage of the last days move in vol and skew.
Buy 1 month 6.3900 USDCNH put
Sell 1 month 6.3400 USDCNH put
Cost 155 pips (6.3900 put cost 254 pips)
Alternative
Buy 1 month 6.3900 USDCNH put
Sell 1 week 6.4100 USDCNH call
Sell 1 week 6.3700 USDCNH put
Cost 100 pips
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