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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FXO Market Update - Mar 15
Summary: Risk has moved from Euro to Asia focus over the last days after reports Russia has asked China for military aid. EURUSD spot has range traded a fair distance above the lows over the last weeks and vols trades soft. USDCNH spot has traded up from 6.33 to 6.41 over the last days and vols and risk reversals are marked higher, 1 month is up 1.25 vol to 4.75 and 1 month RR up 0.5 vol to 1.0 for topside.
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.
EURUSD hit new lows at 1.0800 on Monday last week and have since then traded higher and somewhat stabilized between 1.09-1.11. EURHUF and EURPLN spot have traded down around 6% from the highs last week and we have seen a quiet start of the week with spot moves slowing down. EURUSD 1 month has traded between 10.25 and 11.25 over the last week after peaking at 12.6 on Monday morning last week. EURPLN and EURHUF vol is down from the highs as well with spot lower but we still see mainly buying interest and liquidity remains poor. Both EURHUF and EURPLN trades around 16 vol after trading above 18 vol at the start of last week.
Market focus has now shifted to China after the recent headlines that Russia has asked China for military aid. USDCNH spot is up from 6.33 to 6.41 over the last three days and 1 month has jumped from 3.25 to 4.75 while 1 year is up from 4.80 to 5.30. 1 month risk reversal is 1.0 vol for calls compared to 0.50 a week ago while 1 year risk reversal is up from 1.10 to 1.35. 1 month vol and risk reversal is trading at the highest level in almost a year while the 1 year still trades at average levels.
We have seen some big move higher in USD over the last days with USDJPY breaking up above the 116 resistance and quickly moved up to current levels at 118 which is the highest level in 5 years. 1 month vol is up from 7.0 to 7.75 and 1 month risk reversal trades at 0.5 for puts after trading at 1.5 for puts a week ago. AUDUSD has grinding higher during the start of the year but the bulls gave in at the end of last week and spot has dropped from 0.7360 to now trade below 0.7200. Both vol and risk reversals have jumped to trade at YTD highs with 1 month at 12.1 and risk reversal at 2.1 for puts. - 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 – An introduction
Forex Options – Exotic options
Forex Options - WebinarsLatest Market Insights
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