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Busier CNY, GBP Make Up for Quieter EUR, JPY Hedges

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  • Following an understandably muted session for currency hedging markets on Monday, activity bounced back yesterday with near $110bln notional crossing via the DTCC. Wednesday trade so far is slightly more muted, but busier CNY, AUD and GBP hedges are compensating for quieter JPY and EUR trade.
  • The front-end of the G10 vol curve is seeing small support, as the pullback in USD vols evident off the April highs begins to slow, and partially reverse. This keeps GBP/USD 1m vols in line with the YTD average of ~6.5 points.
  • GBP/USD activity so far today leans toward upside demand, with decent interest in short-dated call strikes layered between $1.2500 and 1.2530 largely responsible – a decent part of which expire on Friday – thereby capturing tomorrow’s BoE event risk.
  • The normalization of the CNY vol curve off YTD lows (3m risk reversal vols briefly shifted to favour USD/CNH puts over calls for the first time since 2011 in March) persists, with upside exposure again the theme: over $3 in calls have traded for every $2 in puts, with demand for call strikes evident as high as Cny 7.2700-7.2850.

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