Divergence in EURUSD vs USDJPY risk-reversals – BNPP

By FXStreet Vasilis Koutsaftis, Research Analyst at BNP Paribas, suggests that the USDJPY risk-reversals are pricing more JPY strength, whereas EURUSD riskies have repriced sharply for renewed EUR weakness.

Key Quotes

“An abrupt repricing of expectations of Fed hikes has triggered a turn in the USD trend. The DXY dollar index has fallen around 3% in February, still less than the 6% drop experienced in Q2 2015. The latest bout of USD weakness has been concentrated vs. current account surplus FX, as elevated risk aversion supports those currencies.

Going forward, a scenario where the market cannot price for Fed tightening is likely to be also characterized by elevated risk aversion, a scenario likely to keep high beta FX or EM under pressure. Therefore, to position for continued USD retreat, we would focus on selling USD vs the JPY, EUR and CHF. Commodity bloc currencies could continue to weaken vs USD, but by much more relative to the EUR, JPY or CHF.

The implications of this scenario for FX vols is that EUR cross and JPY cross continue to outperform USD- based vols.

An interesting development is taking place in the relative pricing of EURUSD and USDJPY risk-reversals, with USDJPY riskies pricing increasingly continuation of …read more

Source:: FX Street