technical technical technical

FXO Market Update - Bumpy road ahead

Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  A busy week ahead with ECB today, US CPI tomorrow and FED on Wednesday next week. EURUSD O/N trades around 20 vol, which is approximately 90 pips breakeven, while 1 week trades around 11.25 vol or 140 pips. This is the highest O/N vol seen over the last 10 meetings but then it also include the US CPI tomorrow. We prefer to be long 1 week over O/N to also get FED next week.


Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

09_MAAL_1
FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
09_MAAL_2
Source: Bloomberg, Blue: EURUSD spot

Busy week ahead, we kicking off with ECB today and follow up with US CPI tomorrow and round off with FED in a week. EURUSD spot has been stuck around 1.0700 for the last couple of weeks and we could probably see spot break out and start move again with all the events lined up for the next week. ECB is first out, market expect rates to be left unchanged with the first hike in July. The market is pricing around 120bps hikes in the 4 meetings from July to end of year so the focus for this meeting will be if a 50bps hike is in the cards for the next meeting.

EURUSD O/N trades around 20 vol, approximately 90 pips breakeven, which is at the high end of the past 10 meetings. But then it also include the US CPI tomorrow which also has a high event risk priced in. 1 week EURUSD trades around 11.25 vol, approximately 140 pips breakeven, which include all three events.

We think we could expect a choppy market over the next week and EURUSD could take off in either direction if all events align. We prefer to buy 1 week over O/N and either buy a straddle and trade spot around the strike or buy a directional option on either side.

Buy 1 week 1.0715 EURUSD call
Buy 1 week 1.0715 EURUSD put
Cost 136 pips

Buy 1 week 1.0815 EURUSD call
Cost 32 pips

Buy 1 week 1.0615 EURUSD put
Cost 31 pips

Spot ref.: 1.0715

09_MAAL_3
Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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