FOREX: Options Show Markets Won't be Caught Offside on Budget Risk Again
Ahead of last year's Autumn Budget, markets underestimated the market-moving potential of Reeves' first fiscal event. While vols indicated a ~30 pip swing in EUR/GBP, price went on to rally near 150 pips in the next two sessions and even with two months until the event, shifts in option vol suggest markets won't be caught offside again.
- The front-end of the GBP vol curve provide a further signal for market concern over the Autumn Budget. The flatter front-end of the curve and the building premium for 2m implied vols shows markets building a risk premium into the event. 2m vols have posted the sharpest gains over the past week as they begin to capture the event on November 26th.
- This effect is particularly evident in EUR/GBP, for which markets continue to favour as a GBP weakness play given the unpredictability of the USD into year-end. This is despite sell-side pushing out expectations of BoE rate cuts this year (see Deutsche Bank, HSBC earlier this month) - an extension of which could work against the consensus view of EURGBP higher.
- We see sustainability of this week's GBP bounce as resting on the fiscal policy mix ahead. The Gilt curve and, in particular, the longer-end has regained a sense of stability after being marked sharply higher at the beginning of September. How valid and long-lasting this proves to be should determine GBP/USD's ability to hold above 1.3525 (50% mid-Sept downleg) and make meaningful headway toward the bull trigger of the July 1st high at 1.3789.
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SEK: Most notable move in EURSEK
- Today is the most notable single move in the EURSEK in a Month, since 1st August ~9 big figures range.
- For now the cross seems to be finding some support at the Psychological 11.0000 level.
- The early chart to watch was the USDSEK, now close to testing the 2025 low.
EGBS: Limited Benefit To Bunds From OAT Weakness
Goldman Sachs note that “although French assets have been under pressure, spillovers to the rest of Europe - and to EGBs in particular – have been contained. Ongoing declines in rates volatility help to contain risks to other sovereign spread markets. And there has been limited richening in Bunds vs. swaps compared to last year’s snap elections”.
- They provide two possible explanations:
- “Uncertainty in France has not reached the same level as last year, with parliamentary elections likely not yet widely expected and less speculation about President Macron resigning. In the same vein, markets may be drawing some comfort from having witnessed the relatively smooth transition from the Barnier to the Bayrou government last November”.
- “With the ECB cutting cycle now over, German fiscal easing underway, and a more challenging duration backdrop globally, the prospect of substantial Bund outperformance is dimmer”.
- Ultimately, Goldman continue to “expect Bunds to cheapen, both in outright terms and against swaps. That said, to the extent that we expect the cheapening in Bunds vs. swaps to be gradual, the increased tail risk in France and lack of reaction in swap spreads so far diminish the risk reward for tighteners, in our view”.
US: Trump Says India Offers 0% Tariffs, But Getting Late
U.S. President Trump posts the following to Truth Social "What few people understand is that we do very little business with India, but they do a tremendous amount of business with us. In other words, they sell us massive amounts of goods, their biggest “client,” but we sell them very little - Until now a totally one sided relationship, and it has been for many decades. The reason is that India has charged us, until now, such high Tariffs, the most of any country, that our businesses are unable to sell into India. It has been a totally one sided disaster! Also, India buys most of its oil and military products from Russia, very little from the U.S. They have now offered to cut their Tariffs to nothing, but it’s getting late. They should have done so years ago. Just some simple facts for people to ponder!!!"
