With last week’s labour, and now retail sales data unable to provide the US economic clarity many FX investors seek, currency markets will likely continue their confused trade today as investors search for additional Fed policy clues.
Such confusion was already reflected in options markets last week. Importantly however such FX market activity increasingly contrasts with bond markets suggesting their ‘pause’ may not last long. Indeed the steepening of the US Treasury curve warns overly sanguine FX investors risk being caught behind.
Acknowledging this warning, we suggest the recent pause may be a precursor to a more significant shift in FX markets.
Indeed USD positioning may merely be going through an inflexion, rather than turning point before the reality of future Fed tightening begins to bite. If this proves the case in coming weeks, the spectre of higher US rates (and stronger USD) make an attractive case for buying break-out volatility strategies.
In this respect our FX Vol Radar highlights a number of attractive 3 month Butterfly opportunities with AUD/NZD the standout in G10. Moreover those that feel they may have ‘missed the boat’ on USD/JPY might consider SGD/JPY.
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