Forex Institutional Research: Deutsche Bank FX Daily

Forex Institutional Research: Deutsche Bank FX Daily

Key quotes from the Deutsche Bank FX report: 

Cheap USD calls before the FED

USD digital calls vs. CAD and SGD offer cheap plays on a June Fed hike Heading into NFP week rates markets have retraced some of the move due to hawkish Fed speak. But Fed Funds futures are still pricing a 25-30% chance of a June hike. Can we find a discounted way to trade the June FOMC meeting through USD calls? Current 3-week digital pricing for CAD and SGD looks quite attractive in this regard.

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March FOMC USD-cross returns more uniform than you might expect Figure 1 displays intra-day March FOMC USD-cross returns into the NY close. Currency investors might immediate think of USD/JPY or USD/CHF when trading a US rates play. But rates proxies do not achieve the highest returns since Fed actions also impact global growth; hence, commodity currencies have the greatest sensitivity to the Fed. The March meeting was dovish and so the highest beta commodity currencies (NZD, RUB, ZAR) had the biggest returns against the dollar, of almost 2%.

Notice that CAD returns were nearly as large, even though NZD, RUB and ZAR 1m volatilities trade about 3.5%, 9.3% and 10.2% rich to 1m CAD volatility, respectively. Clearly there are many country-level factors driving those vols beyond US rates and commodity prices, but that’s precisely the point: a good USD-cross rates play should react to the Fed and little else, in order to be a cheap Fed proxy. CAD fits the bill nicely in June, as the BoC stays quiet for now and both volatility and skew fall as commodity prices take a breather. No matter how one trades CAD and SGD puts they look intriguing in front of the June Fed.

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