1. FX Outlook
  2. FX Options Weekly

Macro and Vol Commentary

After a strong decline in 2022, the rupee recovered from bouts of volatility and remained in a tight trading range so far this year. With El Nino prospects threatening the usual monsoon season, what is the outlook for the country’s key crops, and, in turn, the Indian currency in the near term?

Indian Economy

  • India’s GDP growth surprised on the upside in Q1’23, growing by 6.1% y/y, up from 4.6% in the previous quarter. Growing investment and exports were the major drivers behind the expansion, even as private consumption remained sluggish.
    • The business cycle most likely peaked last quarter, and slowing nominal wage growth should weigh on GDP performance in the coming months.
    • Still, according to the IMF, the nation’s growth is expected to outpace that of China and the overall Emerging and Developing Asia, growing by 5.9% in 2023.
    • Despite a strong economic growth environment, inflation growth is moderating at a healthy pace, putting the economy in a sweet spot to face the impacts of tight monetary policy.
  • In May, CPI data showed inflation falling further into the RBI’s target range of 4.0%, down to 4.25% in May.
      • This decline has been helped by a fall in food inflation, which is now seen at 2021 lows of 2.9%.
  • As a result, the importance of the central bank narrative has diminished in recent months.
    • The RBI has maintained rates unchanged as expected so far this year but delivered an unexpected hawkish rhetoric.
    • By sticking to this stance, we expect that the RBI is creating a buffer against potential pricing pressures that could materialise in the latter half of this year.
      • As a result, we expect that the rates will remain unchanged until 2024.

Weather and Crops

  • A severe cyclone hit parts of the west coast of India last week.
    • Heavy rains are likely to hit some of the nation’s biggest producers of cotton and peanuts.
    • This comes at a time when the region is facing drought-like risks posed by El Nino, delaying the usual monsoon season, which contributes to around 75% of the country’s annual rainfall and is crucial for irrigating over half of the agricultural land.
    • If the rainfall during this period is insufficient, it might create difficulties in the unirrigated parts of India and potentially diminish the grain output.
      • This could prompt the government to continue with the export curbs on wheat, rice and sugar, triggering further concerns about food inflation.
    • According to the IMD, across 15 El Nino events since the 1950s, there were six occasions when monsoon rains were above normal, with maximum temperatures also above forecast during the season.
      • This could put significant pressure on the crop season this year, and we will continue to watch out for the weather forecast to guide the outlook.

Indian economy is continuing to recover from the effects of the pandemic, but the recovery has been uneven, with exports and investments rising rapidly while private consumption growth slowed. Indeed, the manufacturing sector, which accounts for 17% of the country’s GDP, has been expanding, but services are slowing. This paints a different picture to that of the US and Europe, where a robust service sector is supporting the overall economic performance and bets of further tightening from key central banks. With a delayed monsoon season starting this week, we expect heavier rains to benefit the crop yield prospects, and a solid inflation reduction should further solidify the resistance for USDINR at 83.00. However, with the expectations building for Fed to tighten in July, we expect the pair to remain in the higher ranges in the near term.

Sources: S&P Global, Central Statistics Office India, Reserve Bank of India 

Volatility Comment

Looking at the USDINR implied vs realised Volatility we can see that for 6 months implied volatility has been higher than realised vol. This is an opportunity to sell vol and pick up some premium.

Analysing the price action of USDINR, we can see that for the past 6 months price has been ranging between 81 to 83.

USDINR Trade Idea

  • Seeing that implied volatility is overpriced, we will sell a strangle in the range 81-83.
  • Short Strangle
    SELL USD Call strike at 83
    SELL USD Put strike at 81
  • Notional in 6m USD
  • Expiry 3m (21/09/2023)
  • Premium received, circa 38k USD
  • Breakeven point will be 83.5 for the call strike/ 80.5 for the put strike.

Positioning Charts

EURUSD Vanilla Positioning Data 06/06/2023 - 13/06/2023

EURUSD's positioning saw appetite for upward and lower covers grow, as the number of puts and calls in the outer ranges grew in the week ending June 20th. However, at the same time, call options continue to outweigh that of puts, suggesting marginal upside momentum. The number of options has mostly stayed the same since the week ending June 13th, suggesting that the market has become less bearish but not necessarily more bullish. Greater upside and downside covers highlight this.

Eur Usd 6 13

EURUSD Vanilla Positioning Data 13/06/2023 - 20/06/2023

Eur Usd 13 20

USDCNY Vanilla Positioning Data 06/06/2023 - 13/06/2023

USDCNY option positioning became more balanced in the week ending June 20th, with the number of put options growing as calls remained broadly unchanged. The greater size of the notional of puts to calls suggests a greater incentive for lower prices in the near term; growing downside cover underscores this. Still, in the near-term expiries, the proportion of puts to calls remains fairly balanced, and we struggle to see the pair move rapidly out of the current range.

Usd Cny 6 13 (3)

USDCNY Vanilla Positioning Data 13/06/2023 - 20/06/2023

Usd Cny 13 20 (5)

USDINR Vanilla Positioning Data 20/04/2023 -20/05/2023

USDINR positioning saw upside and downside covers extended in the month ending June 20th. At the same time, the size and number of options expanded, suggesting that the market is seeing stronger appetite about the moves outside of the current range of 80-84. We expect the moves to remain broadly unchanged in the near term, but the appetite outside of these ranges is becoming more apparent.

Usd Inr Apr May

USDINR Vanilla Positioning Data 20/05/2023 - 20/06/2023

Usd Inr May Jun

Charts and Tables

FX Expiries

Expiry (53)

Historical Spot FX Volatility (30D Rolling)

Chart (44)

FX Matrix (today)

Spot (103)

Weekly Change

Week (84)

Key Events & Releases

Calendar (117)



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