FXO Market Update - Nov 03
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.
- 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.
FX Options Trading:
You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date
If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.
By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited.
If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure.
Learn more about FX Options:Forex Options - Webinars
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.