OPTIONS: +$3bn In USD/JPY Options So Far Today, O/N Vol Elevated Ahead Of NFP
In the FX option space, JPY volumes have dominated so far in Wednesday trade, with around $3.1bn in total volumes so far. This is 46.6% of total volumes, per DTCC via BBG and comes despite onshore markets in Japan being out today. Next on the volumes list is USD/TWD with 10.8% of total volumes. AUD/USD, which has broken above 0.7100 for the first time since 2023 just under $600mn in FX options volumes so far today (around 9.5% of total).
- For USD/JPY, the larger volume transactions ($100mn or more), are mostly for puts, with a variety of strike levels. A 143 strike, expiry end April this year was executed for +200mn per DTCC. This comes as USD/JPY continues to unwinds its pre-election bounce, amid signs that government wants to earn the markets trust around fiscal policy etc. Softer US yields are also weighing on USD/JPY.
- USD/JPY risk reversals are rolling back over, but are above late Jan lows. The 1 month is around -1.64.
- In the vol space, overnight vol is elevated near 16.45%, which reflects the upcoming US payrolls print later. Other implied vol measures are sub 10%.
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EUR: EUR/USD - Catches A Bid In Asia, Look For Sellers Back Toward 1.1665-95
The Friday night range was 1.1618 - 1.1660, Asia is currently trading around {EURUSD Curncy}. The pair is getting an early bounce in Asia as the USD gets sold on reports the FED is to potentially be indicted. We are firmly back in the 1.1450-1.1850 range which dominated the last 6 months of the year and we need a catalyst to get a break and some sort of a trend going again. It will be interesting to see how much of a headwind this news brings for the USD as it was just looking to build a head of team to test higher. On the day look for sellers to reemerge in EUR/USD back toward the 1.1665-1.1695 area.
- CFTC Data of last week shows Asset Managers slightly increasing their long positions in the EUR, +424 424(Last +416 483). The Leveraged community reduced their own longs slightly which have only recently been built up, +22279(Last +24505).
- The EUR/USD Average True Range for the last 10 Trading days: 44 Points
Fig 1 : EUR CFTC Data
Source: MNI - Market News/Bloomberg Finance L.P
AUSSIE BONDS: AU-NZ 10Y Differential At FV
The AU–NZ 10-year yield differential currently sits at +28bps, around 10–15bps below its recent peak of approximately +40bps, the widest since October 2020.
- The widening in the long-end spread has been mirrored by shifts in market expectations for the policy rate differential over the next year, as reflected in the AU–NZ 1-year forward 3-month swap (1Y3M) spread.
- A simple regression analysis of the AU-NZ 10-year yield differential against the AU-NZ 1Y3M spread over the past two years shows that the 10-year differential is around fair value based on the regression model.
Figure 1: AU-NZ: 10-Year Yield Differential Vs. FV
Source: Bloomberg Finance LP / MNI
USD: BBDXY - Knee-Jerk Lower To Start The Week On FED News
The BBDXY range Friday night was 1209.18 - 1213.00, Asia is currently trading around {BBDXY Index}. The USD was looking like it was reestablishing some upward momentum to start the year, but this morning's news of possible indictments on the FED have put a dent in that for now. The market's perception is that this is clear political pressure being brought to bare on the FED and so has worrying implications for its so-called independence. The USD has understandably had a knee-jerk lower in Asia, the question is if that move is enough considering what's at stake. On the day, I suspect rallies could remain heavy in the short-term as the market tries to work through what this means. First support is back between 1205-1207, the USD has lacked any clear direction for at least 6 months now and the wider 1185-1230 range looks set to continue for now. This lack of a trend is being reflected in the CFTC data which shows very little positioning in the USD to start the year.
- The Market Ear on X - "US flip from exceptionalism to expansionism is best case for a contrarian US dollar long" (Hartnett)
- Barchart on X - “Google Searches for Dollar "Debasement" soared last quarter to the highest level in history.”
- CFTC Data last week shows Asset managers turning slightly entering the first quarter, -1318(Last +1168). The Leveraged community has turned slightly long after rapidly reducing its short into the end of year, +821(Last +45).
- The BBDXY Average True Range for the last 10 Trading days: 381 Points
Fig 1: USD Index CFTC Data
Source: MNI - Market News/Bloomberg Finance L.P
