FX Volatility Jumped Before Stock Rout in Sign of Things to Come

SocGen's Juckes Says FX Is Not in Crosshairs of Selloff

Days before a surge in volatility riled equities around the world, signs of tumult were emerging in the $5.1 trillion foreign-exchange market.

Not in the typical currencies, mind you. The yen and Swiss franc were relatively calm. Rather, near-term volatility in the British pound spiked last week, while the cost to hedge against declines in the Australian dollar relative to gains peaked and began to reverse.

Sterling and the Aussie have come into focus as barometers of financial market health as traders avoid traditional havens more closely aligned with central bank policy. As the turmoil in stocks seeped into other asset classes, these measures of sentiment have become even more pronounced.

  • GBP 1-week vol is now up ~2.0 vols since Friday, while 1-week and 1-mo. risk reversals have fallen to two-month lows as turmoil in European shares combines with Brexit headline risk to shake up cable ahead of Thursday’s Bank of England rate decision
    • Related Brexit stories:
      • On Monday, ECB President Mario Draghi said the central bank needs to prepare for possibility that the U.K. will exit the European Union without a transitional agreement
      • EU Doc: EU Could Suspend Single Market During Brexit Transactions
      • BOE seen leaving rates at 0.50%
  • AUD/JPY riskies peaked on Jan. 8, though the depth of the move down has been much shallower than in the past with USD bets potentially proving more valuable as risk retreats
    • A BIS weighted index of 1-year currency vols turned higher Jan. 9, well before the latest move in the VIX or move down in the S&P 500
    • AUD/USD 1-year riskies are down for a seventh day with the skew seemingly attached to the price action in shares
  • By contrast, CHF and JPY 1-week vols, while slightly elevated, remain near their respective averages for the past year; back-end vols barely recoup losses suffered at the end of last year
  • Market risk expressed through JPY 1-month 25D butterflies as ratio to ATM climbs to a three-month high; JPY 1-mo. riskies fall for second day with price action loaded into front of curve
    • Strike attached to 3-mo. 25D at 109.20 spot is ~105.00
  • EUR/USD options most active as of 4pm ET, accounting for 33% of DTCC FX option turnover; activity skewed toward EUR calls; Aussie volume well above daily average and skewed toward puts
    • Large Thursday EUR expiries stacked between 1.2200 and 1.2100
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