Good morning

Apologies for writing this so late today.

So with all the CB meetings out the way and a better understanding of what their thinking is regarding interest rate (hikes) and the state of their economies, what should we be looking for now and how has the market absorbed this news.

As a FX Options trader I always look to these numbers to see what the general consensus is regarding the short, medium and long term outlook for the currency.  A FX Option basically is the right but not the obligation to buy or sell a particular currency at agreed upon rate (the strike) today in return for a premium (cost).  I have always found Options to be a better way of adding or reducing hedging requirements as you know within reason (depending if you a buyer or seller of the option) what you maximum upside and downside is.

So looking at the major currencies, and for our purposes lets stick to EUR/USD,  GBP/USD and EUR/GBP.

EUR/USD: this is the most actively traded currency in the world and as such the most actively traded FX Options contract. Looking at the 1m vol at 4.55/4.70 tells me from experience that the market is anticipation VERY LITTLE volatility and is thus happy to SELL these options and earn the premium. The last time we saw vol’s at these levels was over 10 YEARS ago!! I remember those summer months clearly. The rates created havoc amongst option traders who had no interest in hedging or buying volatility. They were happy to sell these options and earn the premium and hedge in the spot market as and when they needed. With the 2 CB meetings out the way, the market has fallen from over 7% (2 weeks ago) to these levels. With the lack of news and Summer around the corner, the market anticipates very little movement in the currency to warrant owning these options and paying away premium (daily) with very little opportunity to recoup the premium from daily trading.

GBP/USD vol have also been smashed though they were no where near 7% like the EUR above. They are down 1% with the 1m vol trading at 4.65/5.00 again showing the lack of interest in owning “vol”. The back end of the curve (6m-1y) is a lot higher and the curve steeper because this takes into account the much anticipated rates hike. 6m is trading at 6.50/6.85 and the 1y at 7.60/7.90 which tells me they are anticipating movement in the coming months.

EUR/GBP vol following the lead of the EUR and GBP vols above, despite trading below 0.8000. Once again the curve is quite steep with the 1m at 4.35/4.50, 6m at 5.55/5.85 and 1y at 6.05/6.30 and little in the way of decent flow going through. The best way to take advantage of these vols is to do “CALENDER SPREADS” where by you SELL the front and BUY the back end of the curve as a way of hedging yourself.

If you would like any more information or advice of FX options JUST ASK and I will be happy to help.

As for spot, the EUR/USD is trading around 1.3600, there is a EUR2bn option expiry today strike 1.3600 which tells me the market will in all likelihood remain around this level until 3pm expiry time.  Unless the EUR can mount another challenge higher, I for one continue to call for a sell off (Buy USD) as we head in and out of the summer and the market starts to reposition itself. I still think we HAVE to break 1.35-1.3480 to confirm the next leg lower.

GBP/USD heading in my direction. I have been calling firmly for a break through 1.7000 (1.7040 now). GBP must remain above 1.7040 to confirm the next break higher. A failure will see a move back to 1.6980 -1.6960 again. Having said that I still like GBP stronger.

This all means EUR/GBP should remain below 0.8000 (1.2500) and my target is for 0.7050 (1.2580) in the coming days.

This all bodes WELL FOR GBP IMPORTERS who need to buy foreign currency (sell GBP). I am afraid the same does not hold true for Exporters selling foreign currency to BUY GBP. Unless you hedged yourself I am afraid to say the ship has left the harbour.  All you can do now is either forward hedge OR my favorite do a Risk Reversal buy BUYING GBP Calls and SELLING GBP Puts – zero cost. That way you have your hedge in place and you know your best and worst case scenarios.  Again happy to discuss and explain.

Wish you a pleasant weekend ahead