Risk Latte - Asian FX Volatilities - Turning Point?

Asian FX Volatilities - Turning Point?

Team Latte
Oct 14, 2004

The Asian currency volatilities are at multi-year lows. A large number of currency traders and hedge fund managers expect a major turn-around in volatilities and some believe that these are the inflexion (turning) points for these vols.

  USD/TWD USD/KRW USD/THB USD/SGD USD/HKD USD/CNY USD/INR
1m
2.55 / 2.85 3.80 / 4.30 3.50 / 4.00 3.90 / 4.30 0.70 / 1.30 1.75 / 2.75 3.90 / 4.90
2m
2.70 / 3.00 4.40 / 4.90 3.60 / 4.10 3.95 / 4.35 0.80 / 1.40 2.00 / 3.00 4.10 / 5.10
3m
2.75 / 3.05 4.80 / 5.30 3.70 / 4.20 4.00 / 4.40 0.90 / 1.50 2.25 / 3.25 4.40 / 5.40
6m
3.25 / 3.55 5.50 / 6.00 3.90 / 4.30 4.40 / 4.80 1.00 / 1.50 3.75 / 4.75 4.90 / 5.90
12m
4.00 / 4.30 5.80 / 6.30 4.00 / 4.40 4.70 / 5.10 1.10 / 1.60 5.50 / 6.50 5.20 / 6.20

The front end of the curves are all offered as the spot had been in tight range for some time, and being long gamma is not proving to be very profitable. Though a large number of traders and hedge fund managers are long volatility they are losing money their theta is decaying because of a lack of movement in the spot.

However the 6m vols provide very good value for both USD/TWD and USD/KRW and our in-house trader would prefer to go long the 6m tenor for both this currencies.

China will not revalue this year, although there are ripe rumors from Korean newspapers that revaluation is imminent. A couple of traders we talked to this afternoon preferred to sell the 3m USD/CNY at 2.5 vols, which looks pretty high to us for a pegged currency, albeit the forwards move.

Thai Baht is another story. Oil at 54, is not good for the economy (the most sensitive Asian economy to Oil). The stock markets lost more than 2.00 pct, and it appears that most of the investment houses are pulling money away from Thai SET, and buying the USDs. Hence the USD/THB stopped gapped from 41.40 to 41.46, and then traded lower. Oil worries pulling USD/THB upwards; while weak US economy pushing it lower. It had been in a narrow range. Some traders mentioned to us that the 1-yr vol looks to be a good value to go long for this currency pair.


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