FX options brace for a bigger USD recovery
Oct 11 (Reuters) -The recent price action in forward looking FX options shows a market fearful of a bigger USD recovery and positioning itself accordingly.
FX positioning shifted sharply toward a weaker USD with the onset of the U.S. Federal Reserve's rate-cutting cycle. However, a modest USD recovery, driven by reduced expectations of rate cuts, has understandably fuelled concerns over further USD gains.
EUR/USD options highlight those fears, despite the spot setback from the low 1.12s stalling ahead of 1.0900. Risk reversals are an option that benefits from FX volatility in a particular direction and the benchmark 1-month expiry 25 delta contract continues to add premium for USD calls over USD puts - the right to buy the USD versus sell it. It traded at its highestsince early July at 0.4 on Thursday and has extendedthat to 0.425 on Friday.
It's a similar story in GBP/USD where the benchmark 1-month expiry 25 delta risk reversals also trade new highs for USD calls over puts since early July at 0.55 and in AUD/USD where the 1-month risk reversals test the mid August highs at 0.9 for USD calls.
The U.S. election poses an additional risk factor for options that expire in its wake, as demonstrated by the benchmark 1-month expiry implied volatility. A victory for Donald Trump is expected to benefit the USD.
For more click on FXBUZ
EUR/USD benchmark 1-month expiry 25 delta risk reversals https://tmsnrt.rs/4dGcntR
GBP/USD 1-month 25 delta risk reversal https://tmsnrt.rs/3N9YV6T
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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