FxWirePro: a glimpse though FX options market amid Italian election risks
Source: FxWire Pro - Geo Politics / 31 Jan 2018 03:50:04 Eastern Standard Time
There is a late swing in the Italian opinion polls in favour of MS5. While holding forecasts unchanged, we have established a decent long EUR position in the macro portfolio (vs JPY, NZD, and an EURUSD proxy).
The concerns about the Italian elections mount in 1Q’18 that poses bullish risks to the Swiss franc. While the election frontrunner Matteo Salvini said his party is ready to withdraw from the European Union and the Eurozone unless Brussels stops "victimizing" Italy with harsh economic demands.
Italian election risk premia have continued to slide this year (refer above diagram), and yen-crosses, in particular, have been the largest casualties of the re-pricing.
At current levels, 4th March O/N vol levels in JPYKRW (8.7), AUDJPY (14.2), USDJPY (11.1), GBPJPY (13.7) and CADJPY (13.7) all look unthreatening, especially when compared to the frenzy of the French election episode (refer above diagram).
On average, options markets are priced at 50% of the event premium of the 1st round of the French vote from last year which is perhaps fair on the whole, but there is significant dispersion across currencies that creates the potential for relative value:
JPY crosses are at the cheap end of the spectrum with an average French election O/N multiple of 0.4.© FxWire Pro 2018. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.