Late August has seen some vigorous tail-wagging driving price action – in particular, EM and oil-driven risk aversion has served to undermine the previous dominance of the Fed. We expect the “dog” to return to center stage next week.
Rising EM risk premiums have had numerous effects in other markets: we think vol surface inversion in G10 FX hedges (notably AUDUSD and USDJPY) and the de-coupling of gold from real rates stand out.
For the view that Fed-centric pricing is re-established, we recommend using vol and skew pricing to cheapen downside structures in AUDUSD and upside exposure in USDJPY. Read the full report