JPMorgan and Deutsche Bank have recently seen demand rise for trades based on bearish views on the U.S. dollar relative to high-yielding currencies and have structured a series of basket trades as a result. David Kitson, head of currency and commodity structuring at JPMorgan, said the firm has been offering basket trades to reduce the price of the options. Investors have been asking for exposure to currencies including the Polish zloty, Canadian dollar, Swedish krona, Norwegian krone, Indonesian rupiah and Mexican peso.
In the trades, investors win if those currencies appreciate relative to the greenback. Kitson said he has seen most demand from hedge funds and Sridev Ramaswamy, a foreign exchange structured options trader at Deutsche Bank in London, said private banking clients and insurance companies have come to them looking for extra yield pickup.
Kitson explained the trades are popular because they are using U.S. dollars--which have a low interest rate--as a funding currency. Most of the trades have had a one-year expiry because the interest rate differential is more pronounced than on a shorter-dated trade, Kitson explained. Investors are taking the view that low global growth expectations, low inflation and fund underperformance will result in a relative outperformance of high yielding currencies in the fx market as investors search for higher yield. Purchasing a basket option as opposed to calls on individual currencies is less expensive because it is expected that the currencies will not be 100% correlated, Kitson explained, adding that it could save investors 40% on a trade.
