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FX Options Weekly

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Macro and Vol Commentary

The INR has recovered well in the last week against the basket of currencies, despite a weak economic backdrop. However, can this rally continue?

India data

  • Indian economy shrank 23.9% q/q in Q2, the most drastic fall ever recorded
    • Construction, manufacturing and transport, hotel, & trade industries bore the brunt of the decline, with declines of 50.3%, 39.3%, and 47.0% y/y respectively
    • Agriculture was the only bright spot, growing at 3.4% y/y, vs 3.0% in Q1
  • We expect economic activity to trend higher in Q3, as domestic demand and exports are getting stronger, giving rise to the rupee
  • Headwinds in Q3 prevail, as businesses seek more financial support from the government, keeping the unemployment levels elevated
  • Unemployment picked up to 9.1% on the week ending August 16th, up from 8.67% a week prior
    • According to CMIE, salaried jobs fell to 67.2m in July, down only slightly from 68.4m in April
    • The real figure could be much higher due to millions of migrant workers who have lost their jobs
  • In late March, India initiated one of the most severe lockdowns globally, shutting down most of the transportation and businesses
  • India now has the world’s highest number of daily new infections, at 78,512 as of August 31st, as the government continues to lift restrictions
  • Additional uncertainty around uneven reopening and lockdown measures across the states complicates the recovery
  • Markit PMI slowed down in July as manufacturing was a drag on the economy
    • Composite PMI 37.2 in July, up from 37.8 the previous month
    • Services PMI for July was at 34.2, up from 33.7 in June
    • Manufacturing PMI was at 52.0 in August, up from 46.0 in July
      • Indication of stronger PMI in Q3
  • The trade balance returned to a deficit of $4,830m in July, after a rare surplus of $790m in June
    • This could be attributed to increased import level of merchandise and commodities, such as gold and oil
    • We expect the deficit to widen even further, as demand for other imports starts to normalise
    • According to the Reserve Bank of India, Indian imports of principal commodities were $1,784.48m in July, more than double from $608.69m in June
  • The rupee has risen to a five-month high of 72.7350
    • This could be attributed to RBI refraining from currency intervention
    • Additional special market operation announcement by the RBI this Monday are meant to maintain stability during the pandemic
    • The benchmark 10-yr yield dropped to 6.109, down 1.56%
  • The gloomy outlook around economic recovery puts pressure on the government to deliver more stimulus
    • There is limited room to act, as government budget deficit stands at 7.0% of GDP for 2020, twice the original target
    • Inflation is forecast to be around 2-6%, keeping interest rates low

India, Japan and Australia supply chain pact

  • Trade ministers plan to launch an initiative this year to counter China’s trade dominance
  • Indian Prime Minister restricted some of the Chinese imports and banned several Chinese apps after a deadly border clash with the country along the Himalayan border
    • In 2019, India imported $70bn worth of goods from China

The economy is starting to open back up; however, this recovery is not uniform, and some states are seen closing down soon after reopening businesses in the area. Activity in the economy also appears to have bottomed out, highlighted by high-frequency economic indicators. Comparing to other global economies, India’s economic recovery will struggle, as stringent lockdown measures along with massive job losses in the urban parts of the country will keep the income levels low in the medium-term. New supply chains with Japan and Australia could help the export sector to recover; however, we do not envisage this pact happening in the near future. The growing agriculture sector will support India’s return back to normal; however, consumer confidence and spending will be integral to domestic demand recovery. We expect stimulus measures from the government and RBI to remain subdued as the economy emerges from the pandemic.

Volatility Commentary

General Comments

Following the Fed Chairman Powell confirming a shift in the Fed’s thinking of inflation to target 2% long term inflation (potentially allowing certain years to run >2% to make up for sub 2% years), we saw further weakness in the USD, with this much looser approach to monetary policy. As such this week, with GBPUSD over 1.3400 and EURUSD trading this week (briefly) over 1.2000 for the first time in 2yrs through FX major pair, vols have remained relatively steady.

USDINR Comments

As mentioned above, we have seen in the last week INR strengthening slightly, paired with across the board USD weakness, we are seeing USDINR at levels not seen since March. As mentioned above, India and China having border skirmishes, and with India still struggling with its CV19 management, we are seeing USDINR implied and realised volatility pick up. Given the CV19 situation in India, we would expect the potential for INR to strength to reverse and we expect that, though USD weakness may continue in the short term, we would expect longer-term a reversion to this. Noting that we also see an inversion in the volatility surface, we suggest being short shorter date vol circa 1m expiry and long longer date vol circa 2-3m expiries.

USDINR 1-month Implied and Realised Volatility

USDINR Trade Idea

  • Sell 1-month USDINR Call 74.50 strike in 10m USD for circa 28k USD
  • Buy 3-month USDINR Call Spread 74.00 and 75.50 strike in 10m USD a leg for circa 66k USD
  • Total cost overall circa 38k USD

Positioning Data

The recent dominating headline in the FX market over the last few weeks is the recent USD weakness; this furthered last week with the Fed changing its inflation targeting. Unsurprisingly, we are seeing a slight tilt in the positioning data for short-term furthering of USD weakness here, though, with the CV19 situations in Brazil and India being far from under control, we could see a reversal of this.

USDBRL Option Positioning Data 25/08/2020 - 01/09/2020

USDCNY Option Positioning Data 25/08/2020 - 01/09/2020

USDINR Option Positioning Data August 1st - September 1st 

USDINR Option Positioning Data July 1st - August 1st 

Charts and Tables

FX Expiries

FX Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases



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