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Currency Markets Complacent Over QE Taper, According to Options

  • This week, the cost of hedging against sharp swings across both EUR/USD and GBP/USD via 10-delta 6m butterflies has dropped to multi-decade lows (all-time lows in the case of EUR/USD). This reflects the now historically cheap premium of far OTM calls/puts across both currency pairs, possibly expressing the view that ample liquidity is here to stay and major central bank policy switches in the near-term are unlikely.
  • This, however, is not reflected across other asset classes. The 6m Treasury MOVE Index (a proxy for implied US Treasury implied volatility over six months) has been grinding higher off the June lows and this week hit the best levels since April.
  • Both the butterfly options and the MOVE Index capture the Fed's Jackson Hole Policy Symposium at end-August as well as two cycle of the Fed's SEP, meetings at which sell-side analysts have flagged for taper risk.
  • This may be underpinning the rise in the MOVE index, but markets see little risk of currency volatility accompanying any taper in asset purchases.

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