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FXO Market Update - Will FED deliver?

Mathias Alrixon

OTC Derivatives Trading

Summary:  Last week’s BoJ and ECB did not move the market and EURUSD has been trading in a 100 pips range over the last week. FED is next in line and market is pricing in a 75bps hike. USDJPY has traded lower together with falling yields and closing in on the 135 support.


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.

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.
Source: Bloomberg, Blue: USDJPY spot

Last week’s BoJ was a big nonevent while ECB hiked by 50bps, market was split between 25 and 50bps, but we didn’t see much reaction in the market. EURUSD has been trading in a 100 pip range over the events and we don’t expect much action before FED tomorrow. The curve play from last Tuesday turned out pretty good which will result in a long 3 week 1.00 put that we paid net 18 pips for if EURUSD can stay between  1.00 and 1.03 up to expiry.

USDJPY has traded lower over the last days on back of recession fears and lower yields. Front end vols have traded lower as some event risk has been priced out and the curve trades pretty flat with 1 month vs 3 months spread trading flat for the first time in three months, both 1 month and 3 months trades around 10.25. The spread was trading at a 2 vol premium for the 1 month about a month ago. Market is expecting a 75bps hike from FED tomorrow but with risk of a dovish tilt which could be enough for USDJPY to challenge the 134.25-135 support area. We like to buy USDJPY puts for a test of the support. 1 month Risk reversal trades 1.2 for puts so buying put spread gives good discount to just buying a plain put.

Buy 1 month 135.00 USDJPY put
Sell 1 month 132.00 USDJPY put
Cost 74 pips
The 135 put cost 114 pips

Alternative buy a put-fly

Buy 1 month 135.00 USDJPY put in 1 mio
Sell 1 month 132.00 USDJPY put in 2 mio
Buy 1 month 129.00 USDJPY put in 1 mio
Cost 52 pips

Spot ref.: 136.60

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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