Corporates entered Thai baht/U.S. dollar strangles last week after implied volatility fell in recent weeks on the currency pairing. "Vols are softening on the front end," said Johnson Wong, senior currency options trader at HSBC in Hong Kong. He continued that with low volatility, corporates with baht exposure were looking to profit on the vols remaining low and gain on the day-to-day time decay via strangles. "This makes sense if the market stays within a tight range," noted Wong. In a typical position, Wong said two-month U.S. dollar calls/baht puts were sold at THB45.5 while two-month U.S. dollar puts/baht puts were sold at THB44.2.
Implied vol for two-month options on the pairing averaged around 4.7%, down from 6% a month ago, while historical vol stood around 6%. Peter Redward, Asian currency strategist at Deutsche Bank in Singapore, attributed the fall in volatility to the central bank's change of policy, whereby it not only focuses on an inflation target but looks to keep the currency stable through intervention. Spot was at THB44.7 last Thursday. Typical sizes on the trades ranged from USD10-20 million.
"As the central bank wants to keep the exchange rate extremely stable, there is limited room for speculative interest," according to Simon Mahadevan Flint, senior market strategist at Bank of America in Singapore. "Look elsewhere for excitement," he quipped. BofA's year-end forecast for the baht is between THB45.25-45.5.
USD/THB Spot & One-Month Implied Volatility
Source: J.P. Morgan Chase
