A Stumble, A Trip, But Not A Fall: What Is The Trade? - BofA Merrill
Focus of the day:
"Global financial markets have once again been thrown into a tailspin following the Chinese equity rout and though we are now over seven years on from the global financial crisis, the markets have continued to be punctuated by periodic bouts of volatility and more significantly, fear.
The path to recovery and global market healing since 2008 has not been a smooth one and underpins just why investors remain nervous over current developments. However, recent dynamics echo those of last October rather than other “tantrums” and in our view FX markets have over-reacted. The pressure in the major FX pairs has been driven by positioning rather than by panic and the relative stability of the FX basis is a key difference between previous bouts of broad-based market volatility.
We have recently discussed how the current dislocation of FX from its traditional anchors provides value. We have highlighted our preference to be short CHF/JPY on valuation grounds while we also think EUR/USD will continue to head lower into the end of the year.
The policy divergence trade is therefore still alive and kicking, but we are cognizant the market remains nervous and that a period of elevated volatility is likely to persist. Consequently, we recommended structures to capture a period of elevated volatility. EUR/USD 1mth straddle structures look particularly attractive at present."
Kamal Sharma - Bank of America Merrill Lynch
