Volatility: low tail risk groups and EM's - Socgen

Analysts at Societe Generale explained that volatility is diving into tail risk space.

Key Quotes:

"We use our Quant team research about volatility of volatility to group currencies according the market implied tail risk and identify relative value opportunities. The ‘low tail risk group' includes EUR/USD, AUD/USD, USD/CAD and USD/CHF. EUR/GBP and JPY crosses comprise the ‘moderate tail risk group', while cable unsurprisingly presents the highest tail risk. Our analysis suggests Buying USD/CHF 3m butterfly against EUR/USD, and Buying USD/JPY 3m butterfly against EUR/JPY.

Dissecting EM FX total returns

We find the relationship between real rates and FX total returns to be asymmetric; a widening US-EM rate differential has been a good signal for being long USD-EM on a total return basis, whereas a narrowing US-EM rate differential has been becoming increasingly weaker and less reliable in recent years. Meanwhile, coordinating with broader rationales such as external balances, growth performance and volatility can be a better platform to assess inter-EM investment opportunities."