Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: US election day is here. O/N volatility for the election has gradually come lower over the last month and market is now pricing in around 1% move in both EURUSD and USDJPY.
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.
We have finally arrived at the much-anticipated US election. USD has traded stronger over the last week with EURUSD down to 16-handle and USDJPY has moved up from the 104 support to currently trading around 104.70.
Vols for the election have gradually been trading lower over the last months but we have seen a small pick up of vols over the last days as market is doing the last adjustments to their positions. The table above shows the O/N forward vol and the implied expected move for the election day as it was priced on 3 August and 8 October and where it is trading today. USDCNH is the only pair that trades at the highest vol level since August while UDSJPY is significantly lower than where it traded in August. The higher O/N vol in USDCNH is mainly due to the higher underlying vol after China removed the counter cyclical factor from the fix last week.
Notable is the O/N risk reversal is priced around flat in EURUSD and GBPUSD indicating no directional bias from the market. While risk reversals in USDJPY and AUDJPY is priced high for the downside and the USDCNH is priced high for the topside, all in normal risk off fashion, indicating the demand for heading against a contested result.
Flow in the market has been mixed and we have not seen any dominant trade over the last days except for some demand to buy short dated topside USDJPY. As we have discussed in the previous updates on the election, the market still prefers to own options for next week over buying the O/N due to the risk of a delayed result.
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