Monday, 7 April 2014

April 7th

G10 Overview:

Last weeks only interest was the on estimate NFP, which sparked some buying of carry currencies, and also managed to leg volaitlity lower. It wasn't just DM carry that was bid, EM pairs were well bid also, meaning my long MXN, short EUR call from a few weeks back got closed from Here for a 2.5% gain. Would have bought other EM pairs, but can't, so... yeah. This search for yield pushed the AUD back towards 0.93, and with US yields looking subdued, there is potential for a break higher here. However amidst the constant back and forth regarding QE from the ECB, the EUR ended barely changed last week, only down 40bps of which most has been given back today. It is clear the line in the sand going forward is 1.3700 as shown from this chart.

A break lower, threatens a move towards 1.35 as longs would look to cover their gains. This fits reasonably tightly with my long USD bias that has been built over the last few weeks.
Likewise, USDJPY traded heavy today as US equity pulled further back from their highs, as such the 103 level is very much in play, further weakness from Equity and we will likely trade 102.65 ahead of larger bids down towards 102.50

USDJPY short term techs

Rates overview:

Quite simply, the lack of a "really" strong NFP, weak shorts across the US rate complex decided to cover at the key 2.8% handle in the 10's sending the US rates lower across the curve. It is important to note that nothing fundamental has changed and we can merely sell US bonds at a 10bps better price here. This being said, the short term technical picture is troubling and as such I'm looking to stay out until it settles.

Below we can see the US 10 year yield and the 1Y ATM volatility for a 10Y swap, the Implied volatility is as low as it was this time last year (pre-taper-talks). While I would love to position long Vol given the impending move I expect, I can't trade swaptions... so yeah.

US 10 year yield vs 1Y IV (please note, just because I overlayed them, doesn't mean I think either Vol goes to >100 or US rates go to 1.7%, Kthxbye)
For the USD, short term movements in the US rate complex will be important, as such depending on which way we break here, it will determine my bullishness/bearishness in the short term.

However its not just UST volatility that is low, FX volatility (in particular GBPUSD) is crazy low

GBPUSD 1 month volatility,  lowest in my lifetime!

As we can see, implied volatility traded on the bid side to 5 today, dropping hugely over the past few weeks, and while there are major global macro events still unfolding (ECB decisions, Fed taper program, Ukraine etc)

GBP 1 month vol
 However that was implied, if we look back at the past 1 months actual, realized volatility, we can see that on a closing basis, it was 3 (2.96 at one point)!! This is the lowest in my lifetime, as we traded in under a 1.5% range! This can be seen from the red line below (purple is implied, histo is the spread)

GBP 1 month Historical vol, 1 month implied vol, and their spread
When looking at the surface, we can see across most tenors a very small skew between call/puts, this being said, on the 1 month, the lowest demanded strike is 1.67.

GBP vol surface

Given the mean 1 month historical vol is 8.2 over the course of my 18 years, I think we do mean revert higher, however it is still difficult to see a catalyst for this... Global central banks still suppress volatility with their rhetoric, and this isn't likely to change anytime soon. The "goldilocks" US data is sure as hell not helping either. Even though theta is a bitch, and given no obvious reason for vol to go higher, getting long vol is tricky... But given the historic levels we are seeing, I can't really help myself.

As such I'm looking to buy a 25th-June-2014 ATMF (1.66) straddle, this costs almost exactly 2% of notional, meaning I need to see the GBPUSD move 2% from 1.66 to breakeven, however I will look to delta hedge this trade on a daily basis so as to more closely replicate a pure volatility trade. The latter tho, given my bearish tendency for the GBP layed out quite clearly in the second half of this I may skew my exposure sometimes to have a mildly short GBP position.

Still bearish GBPUSD as mentioned above, but playing via options in short term - also that expiration, because its the day of my final exam and I hope to have a nice win to make up for the stress of my Maths Papers!

US equity drop of presenting some short term opportunities

We've seen an almighty 3% drop from the high - frankly I'm surprised the world has ended, but hey... twitter acts like it has - yet, given the VIX term structure, I still see the best BTFD opportunities occurring modestly lower. Each of the last dip buying occurrences have seen 1 month VIX trade higher than 3 month (histo goes red). As it stands right now, this is not yet the case and so I'm quite willing to buy.

ES front month, VIX term structure, spot VIX

However, given the fact that as the S&P drops VIX rises, I like to get short VIX while also being long S&P. Mostly the VIX has turned around in the 20's so there is still upside there, but when we get there, I will look to sell short term 1730 puts on ES futures contracts, Obviously we are not there yet so I'm not sure the price of them (cba work it out either), but this is my play going forward. Looking to sell downside puts when the T.S. inverts and VIX >20.

Either way, I look forward to another slow week in FX (and you know its boring, when I start to look to the equity markets!), for the BoJ tomorrow, I expect not much, an ATM straddle expects about a 40 pip move, not too much.

Riksbank coming up soon, generic words - but deflation is a real concern there, so I expect it to be dovish at the very least. Still bearish SEK.


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