The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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FXO Market Update - Mar 23
Mathias Alrixon
OTC Derivatives Trading
Summary: TRY traded down as much as 15% before trading back some of the losses after President Erdogan replaced the CBT governor over the weekend. Vols trades a lot higher and we have seen a short squeeze in the funding. USDTRY 1 month trades around 45 vol, up from 17 last 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.
TRY opened the week by dropping over 15% after President Erdogan replaced CBT governor Agbal. USDTRY almost touched 8.50 as the high on Sunday opening but has then taken back some of the losses and now trades around 7.80. The replacement of the CBT has introduced more uncertainty to the rate outlook. The new CBT Kavcioglu has been critical to former CBT Agbal’s policy and the market is now looking if Kavicioglu will reverse some of the hikes seen over the past months.
Market is nervous even if TRY spot has traded stronger over the last hours. We see short squeeze in funding causing the swap points to move far to the right. Vols continue to climb higher even if spot has calmed down and will continue to trade bid as long as we have funding issues and poor liquidity in the rate space.
1 month USDTRY vol currently trades around 45 vol, up from 17 last week. This is considerably higher than the peak during March/April last year and levels we have not seen since 2018. Risk reversals considerably higher as well with 1 month around 12 vols for the topside, compared to 4 vol last week.
USDTRY ON swap trades in the area of 1,000 pips or 10 big figures and usually trades around 40-80 pips. 1 year swap is up from 13,000 last week to 26,000 as time of writing.
We expect poor liquidity going forward and vols to trade bid until we see better liquidity on the funding.
- 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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