Should Elections Matter For Sterling

FX Markets Weekly: Should elections matter for sterling?

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FX Outlook: Should elections matter for sterling?

If one story in currency markets could rival Greece for drama over the next month, it is UK elections. How much polls matter for sterling depends on the horizon. Over the next month the currency will rise and fall on voting intentions, but strength has its limits after May 6 given that a dramatic fiscal tightening is inevitable. Pre-positioning around the election is only justified if the political risk premium is excessive, and this cushion is quite obvious in the options market. Avoid cash trades but sell sterling vol on a spread basis (6-mo GBP/USD vs USD/CHF). Event risks abound next week (Greece, earnings, China): keep outright USD risk minimal and stay focused on crossrates.

FX Derivatives

VXY is languishing in the low 11s, and is likely to remain soft in the absence of catalysts for an immediate repricing higher. Vol curves remain at extremes. Long gamma/short vega is our preferred stance. Owning delta-hedged skews in AUD/JPY has historically been profitable. Sell 3M3M AUD/JPY FVAs hedged with long 6M 25D skews.

Trade Recommendations

Greece will keep markets on tenterhooks. Keep directional risk limited and focus on relative value. Sell 6-mo GBP/USD vs USD/CHF vol to monetize an excessive political premium around May 6 UK elections. Re-sell EUR/CHF through a 3-mo seagull: SNB intervention will wane over Q2 as the Swiss economy accelerates. Within the commodity bloc, CAD remains the favourite: stay long vs NZD in cash and vs JPY in options (95/100 call spread). Take profits on long AUD/NZD (options), as the cross has overshot. Stay long NOK/SEK (1.22/1.25 call spread).

Technical Strategy

The risk-positive environment remains intact though the possibility of a setback remains. GBP shows a remarkably strong performance lately but hasn't delivered the final evidence that the long-term downtrend has been reversed. Stay short EUR/USD, EUR/TRY, EUR/CZK, NZD/CAD and long USD/JPY.

FX Alpha Strategies & Manager Performance

G-10 carry is flat on the week, while forward carry strategies, which have taken on a large set of long USD positions, continue to make gains. Currency managers returned 0.5% to 0.7% in March, compared to 1% gains by global macro funds.

ENDS

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