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📝G10FX USD Vols Seen Cheap Relative to Rates: J.P. Morgan Derivatives Strategy

Within USD/G10, based on the underlying rates vols/correlations (Exhibit 7), NOK, AUD, SEK vols are rich by 2.9, 2.3, 2.2 vols and CAD, CHF, GBP vols are cheap by 2.3, 2.2, 1.9 vols. 1y G10 FX USD vols screen as cheap by 6.1 vols (4.5 sigma, Exhibit 9) relative to rates drivers. Average USD/G10 rates correlation (25% on average) jumped on the US regional banks crisis and has fallen as the March event fell out of the estimation window; all else being equal, lower rates correlation supports higher FX vol fair values.

GBP/SEK, EUR/CAD, CAD/NOK now offer the best opportunity to sell USD-correlation (with corr premium of around 5 corr pts., as on average the premium ranges from 0 to -20 corr pts. on elevated realised correlations), whereas AUD/NOK, CHF/JPY, CHF/SEK amongst others offer room to buy. Both implied and realised proxies of average USD correlation are off the recent lows.

- J.P. Morgan Derivatives Strategy



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