FX Options Insights 18/11/24
The upcoming week's EUR/USD trading is likely to be dominated by large FX option strike expiries and their related FX hedging flows, as there is little significant economic data expected before the release of the Eurozone PMIs on Friday. The majority of these strike expiries are within the 1.0500-1.0650 spot range, which is already defined by existing FX positions. The standout EUR/USD strikes include 1.0500-20 on Monday, 1.0540-50 and 1.0590-1.0600 on Tuesday, 1.0500-10, 1.0540, 1.0585, and 1.0620 on Wednesday, 1.0540-50, 1.0600-10, 1.0650-60, and 1.0690-1.700 on Thursday, and 1.0500 and 1.0600 on Friday.
USD/JPY fell sharply on Friday due to verbal intervention and risk aversion. It recovered on Monday as investors were disappointed by BoJ Gov Ueda's scheduled speech, where he did not seem concerned about JPY weakness and did not signal a December rate hike. The benchmark 1-month expiry implied volatility peaked at 11.2 in Asia on Monday, up from 10.2 in Europe on Friday, reaching a new post-election recovery high, but has since fallen back to 10.65 after Ueda's data-dependent stance. However, risk reversals still hold a higher premium for downside strikes, meaning USD/JPY topside option buyers can benefit from the implied volatility discount.
The net foreign exchange (FX) position is long $18.23 billion, with $13 billion of this held against the Canadian dollar (CAD). Without this unusually large position, the net bet favouring the US dollar (USD) is modest. Traders remain short the USD against the British pound (GBP), Australian dollar (AUD), and Mexican peso (MXN). Speculators have been booking profits on their euro shorts. There are sizeable long positions held against the Japanese yen (JPY) and Swiss franc (CHF), and small bets against the New Zealand dollar (NZD) and Brazilian real (BRL).
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!