It is too quiet

Overall, it has been a relatively quiet week in the FX market, especially under the circumstances. Indeed, the lack of fresh news from the ongoing trade negotiations between the US and China has compelled investors to focus their attention on Brexit developments. Therefore, unlike most G10 currencies the pound sterling had very bumpy week as it was left at the mercy of the vagaries of UK lawmakers.

One could have easily anticipated that the lack of clear driver would have led to increase nervousness among market participants, which should have inevitably affected the option market. With the exception of the pound sterling that has not happened. Indeed, implied volatilities of option on G10 currencies - across maturities - have consistently moved downward, suggesting that investors do not know where to stand following the dovish shifts from both the Federal Reserve and ECB. As usual, investors were more inclined to buy protection against a bullish dollar move, especially against the pound. The divergence between short-term and medium-term in risk reversal measures suggests that market participants have ruled out the eventuality of a Brexit resolution within the next few weeks. The short-term 25-delta risk reversal measures (1-week and 1-month) have recovered lately as they inched up to -0.35 % and -1.14%, while longer-term ones (3-month and 6-month) have stabilised around -1.91% and -2.09%.

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The publication of lacklustre economic data on both side of the Atlantic has left investors in catatonia. How to respond to a global slow down? Buy USD? Take shelter into safe haven assets such as the Japanese yen or Gold? Next week’s FOMC meeting could bring some light into the darkness. However, do not expect too much from the Fed, they are already struggling to shrink their balance sheet without triggering a financial crisis.