While dollar correlations are expected to remain firm, they are expensive to trade directly. A more effective strategy is to target the underperforming cross-correlation space. Sterling cross-correlations, for example, are trading significantly below their implied levels, offering a cheaper way to express the core view.
With traditional carry trades (selling volatility) becoming difficult, an alternative strategy is to harvest skew premiums. This involves targeting currency pairs where option markets overstate the potential for realized skew, such as in crosses like EUR/MXN, to avoid direct exposure to a hawkish US Fed.
Macro investors have heavily bought put options on EUR/HUF, causing deep out-of-the-money put volatility to collapse. This makes the remaining risk reversals (the difference between call and put volatility) appear high, presenting a valuable opportunity to express a bullish view on the Hungarian Forint.
In a stretched low-volatility regime, defensive hedging is cheap but requires patience. A capital-efficient approach is to use subsidized gamma structures: go long front-end at-the-money volatility while selling richer, longer-dated skew. This provides exposure to a potential vol pickup without paying the full carry cost.
Divergence in commodity FX returns presents a relative value opportunity. Based on spot forecasts and current option pricing, a premium-neutral structure of owning the South African Rand (ZAR) and Norwegian Krone (NOK) financed by selling the New Zealand Dollar (NZD) is historically well-priced and attractive.