FX Options Volatility Set to Rise as Currencies Wobble?

Currency tremors before financial earthquake?

Erik Norland, Senior Economist and Executive Director, CME Group
Originally published in the July | August 2018 issue

Europe appears to be on the verge of a political meltdown. German Chancellor Angela Merkel’s coalition government nearly collapsed in the first week of July. Italy is governed by a populist left-right coalition that promises tax cuts and spending increases to the displeasure of bond investors. Spain recently changed the governing coalition without even holding a new election. In Britain, Prime Minister Theresa May has reached several important Brexit agreements by herself but seems unable to win over the backing of her own cabinet much less the Parliament or the European Union. Britain looks like its heading towards a ‘hard’ Brexit – or maybe no Brexit at all.

Despite these concerns and global trade tensions, currency options markets are hardly perturbed. Options volatility is trading at near record lows for all six major currencies versus the U.S. dollar (USD) (Figures 1, 2 and 3).

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