Vasilis Koutsaftis, Research Analyst at BNP Paribas, suggests that the USDJPY risk-reversals are pricing more JPY strength, whereas EURUSD riskies have repriced sharply for renewed EUR weakness. Key Quotes “An abrupt repricing of expectations of Fed hikes has triggered a turn in the USD trend. The DXY dollar index has fallen around 3% in February, still less than the 6% drop experienced in Q2 2015. The latest bout of USD weakness has been concentrated vs. current account surplus FX, as elevated risk aversion supports those currencies. Going forward, a scenario where the market cannot price for Fed tightening is likely to be also characterized by elevated risk aversion, a scenario likely to keep high beta FX or EM under pressure. Therefore, to position for continued USD retreat, we would focus on selling USD vs the JPY, EUR and CHF. Commodity bloc currencies could continue to weaken vs USD, but by much more relative to the EUR, JPY or CHF. The implications of this scenario for FX vols is that EUR cross and JPY cross continue to outperform USD- based vols. An interesting development is taking place in the relative pricing of EURUSD and USDJPY risk-reversals, with USDJPY riskies pricing increasingly continuation of JPY strength, whereas EURUSD riskies repricing sharply for renewed EUR weakness. As a result 25d EURUSD calls are trading 2.7 vols below 25d USDJPY puts. Similarly 10d EURUSD calls trade 5.0 vols below USDJPY puts. Assuming the current market turbulence persists, we would suggest taking this opportunity to sell expensive EURUSD riskies to position for EURUSD strength in the form of (i) buying low delta EURUSD calls, (ii) buying EURUSD calls funded by selling EURUSD puts or put spreads (iii) positioning for cheap EURUSD downside in the form of RKOs. Relative value investors may consider buying low delta EURUSD topside funded by selling USDJPY put spreads, especially in the event that markets begin to anticipate BoJ jawboning.” For more information, read our latest forex news.