Summary: Vols are marked lower and we have seen a more aggressive sell off than expected. We see limited downside in vols from here and think it is a good opportunity to pick up some directional trades.
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 are still waiting for the final result for the US election with a few states left to report. It looks like Biden will win after a much closer race then the polls and betting market showed before the election.
Vols have been sold of quite aggressive, and more than what we would have expected. Both EURUSD and USDJPY 1 month vols are down more than 2 vol from Tuesday highs and now trades close to 4 months lows. USDCNH and GBPUSD 1 month vols down around 2 vol as well but still trades above the lows seen over the last months. We still got the Brexit trade talks risks in GBP and CNH vols are higher now compared to a few months back after China removed the CCF and we can expect higher vols in CNH going forward.
Price action yesterday was similar to last election with spot moving less than expected when looking at open/close rates but with quite big swings during the day as results showed a much closer race than the market had expected. All currency pairs were way overpriced when looking at the open/close range but if you traded the gamma during the day there were good opportunities to make back the premium.
Skews have normalized as most risk has been priced out by now. Risk reversals move closer to par for most currency pairs and 10 delta butterflies are marked lower. 1 month risk reversal in USDJPY is down from 1.60 to 1.00 for puts and USDCNH risk reversal is down from 1.70 to 1.20 for calls.
We do not see much immediate downside in vols for now and see this as a good opportunity to buy some directional trades.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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