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Derivatives Wrap, Policy Focus

US EURODLR OPTIONS
Overall volumes rather muted Monday, traders pre-occupied ahead midweek CPI and Friday's Jan option expiration. Lower underling levels and higher implieds in the first half spurred stead amount of put sales/unwinds.
  • Sporadic vol structure sales as underlying inched off lows, skew still to the puts with low-delta sellers evaporating.
  • Medium term focus on finding value in downside puts targeting first rate hike at the March 15/16 FOMC policy annc.
  • Note -- various dealers bringing there liftoff expectation forward to March as well: GS, JPM, MS and NatWest for starters as well as more details over Balance Sheet normalization.
  • Markets eager for details of timing on Quantitative Tightening as well. NatWest strategists say the June 14/15 FOMC a close call between second rate hike vs. QT, but not both. "This decision should be highly data dependent. We lean to the Fed announcing a second interest rate hike at the June Meeting, but we envision strong risk to an early start of QT."
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