One year of life, one year of strategies
In June 2019 we founded 25Delta EAF, with the aim to provide professional investors with assistance to manage the risk coming from FX in their international portfolios, to provide with a tool to manage the excess cash in companies/familys/investors in a negative interest rate enviromrent, and to show an alternative investment for those pure Alpha seekers. We provided with monthly strategies to achieve these goals, aiming at 6% of return, thus saving the cost of hedging and provinding with extra alpha.
After a year, the sample results show a result of 5.77% with a monthyl annualized volatility of 2%. 10 out of the 11 months we in positive territory, and one of them fall short of target showing a flat result (May 2020). This achievement was done under different market scenarios, from lowest record volatlity to highest in years.
Today, we are launching our 12th strategy for EURUSD, and our 10th for EURGBP.
The current market situation is somewhat similar to the recent weeks in the bumby ride of short-term volatility, but within so far contained levels. After the expiry of the latest strategy o June 10th, we saw a peak in vola that was short lived (graph below).
As we have witness yesterday, with the Fed’s annoncement of an additional purchasing progam of corporate debt, the news from monetary policy makers do not wait for the traditional monthly meetings to announce continous stimulus to the markets and the economy.
This risk-on, risk-off is driven by a mix of “pre-known” policy makers announcements, and the evolution of the Covid 19 across the globe with the uncertainty of an uncontrolled outbreak, that could lead some economies to step back on flexiblity, marking a brake in the opening of the economies. Probably, not as severe as in some countries a month ago, but the move would be sufficiently scary to derail any risk on sentiment very quickly.
As we have continously argue, the FX options market in their short term is a very good indicator, and probably amongst the first ones, to denote a change in sentiment. This was saw again in the first hours of trading wednesday last week after FED’s Powell less enthusiastic remarks on the recovery shape of the US economy, with EURUSD implied vols in a week tenor jumping 26% and 1 month implied 17%, before getting back to pre-move levels today. The spot move of save havens currencies like JPY and CHF also captured this sentiment change (graph below). The S&P 500 VIX moved from 26 to 40 during Thursday, similar to the worst moments in March this year. A big jump, that saw no follow up next day. Last three business days drops of -11, -4.6, and -5.78 as we write this.
On the positioning side, there has been fresh demand for EUR call options in strikes between 1.17-1.20 in the one to three-month tenors.
Technically, there are some confusing signals above 1.1258 fibo.
After today’s better than expected ZEW number, we have Fed testimony before Senate, at 3 pm london, and retail sales data upcoming. Ask for more fiscal stimulus, together with the rumors of an infrastucture package on the way will contribute to keep markets in current long conditions.
Huge expiries yesterday and today (Usd 2bn btween 1.1250 and 1.1335) are providing ample liquidity so the spot should be relatively contained from large moves in either direction.
On Brexit talks, although there is lack of clear agreements, the proximity to the end of given timing at the end of this month, will force both sides to an effort to reach an agreement or to agreed on a delay of another 3 to 6 months. GBP will be exposed to volatility. Our base case, is for an agreement in either way provoking a bullish signal for the GBP against the EURO.
As we are agnostic about the direction of the spot, we design our strategies so that we capture and trade on a move not been priced in correctly by the market at inception.
The cost of hedging has increased in both currency pairs, although not significantly.
We are launching these new strategies today at 2:15pm london, and will expiry on July 20th, with Ecb meeting on July 16th and the Fed on July 29th. Previously BOE meeting is scheduled for this coming Thursday, 18th.