FX Traders, Get Ready: 'Exit Doldrums, Enter Hurricane'

Focus of the day:

"doldrums: 'A region of the globe found over the oceans near the equator, having weather characterized variously by calm air, light winds, or squalls and thunderstorms. Hurricanes originate in this region. – American Heritage. Dictionary of the English Language, Fifth Edition. (2011).'

For half a year, G10 FX, particularly the G4, have been stuck in the doldrums, trapped within ranges by a self-reinforcing combination of low liquidity and low investor conviction. A gust from China temporarily blew them out of the range, but it remains unclear if it is just to a new directionless range, or if, as we enter the North Atlantic hurricane season, the four winds are ready to howl in earnest as they did from June 2014 through March.

We see a persuasive case for the range trading in G10 currencies over the past six months to end. The exact timing remains uncertain; however, we see compelling value in calls on the USD and GBP versus puts on the EUR and commodity currencies, due both to low implied-volatility risk premia and the collapse in skews.

We review three potential themes that may facilitate the return of macro conviction and a break of recent ranges: a return to focus on economic divergence reinforced by policy actions; a world of “Global Missingflation”; and a more severe growth threat from China."

Marvin Barth, Lynnden Branigan, Nikolaos Sgouropoulos - Barclays Capital

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