Implied volatility patterns are erratic across currency blocs with little conclusive evidence of a strong unified theme emerging. So far, vol spreads (implied vols vs. historicals) for several more active currencies indicate historical volatility has yet to fall substantially in line with implieds. Liquidity conditions remain weak though slightly improved from several months back and this will only get better only slowly over time as more risk is put back on. Pure volatility plays, especially in short dates, are still a little premature at this juncture, and so continue to favour smaller, conservative directional positions for now, in anticipation of USD strength.
Buy 3M USD put / JPY call spread
• Buy a 3M USD put / JPY call, 85.00 strike
• Sell a 3M USD put / JPY call, 80.00 strike
• Spot reference: 93.70 • Vol reference (mid): 22.50
• Costs 0.61% USD notional
For investors not convinced that all the bad news is priced in and/or carry unwinds yet to come full circle, the retracement higher in USD-JPY is an opportunity for call spreads that take into account the threat of currency intervention supporting USD-JPY downside. This halves the cost of the vanilla of 1.34% notional.
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