Options Strangle EUR Ahead Of FOMC

With Central Banks continuing to pull the strings it's not too much of a surprise to see limited forex movement ahead of and around most monetary policy announcements. The FOMC begins its two day meeting today and most expect the committee to make the final taper, ending bond purchases ($15b) and begin the countdown to interest rate hikes. It was only a couple of weeks ago that Fed member, Governor Bullard, indicated that the FOMC should consider delaying the end of the QE taper this month to help stem the slide in inflation expectations – it's no surprise that the market does not seem to be buying into his opinions.

What the market wants to know is whether this week's FOMC meet will provide the trigger for further ‘big' dollar gains in the near-term. No matter what, investors should be expecting volatility to remain subdued ahead of tomorrow's afternoon announcement. It's only when there is a surprise that volatility will pick up, just like this morning's Swedish Riksbank announcement. Most expect the Fed to maintain their commitment to keeping low rates for a “considerable” time, while acknowledging the weaker outlook for global growth – nearly a prerequisite for every Central Banker these days. This, coupled with QE finally coming to an end, should be working to limit the ‘big' dollars rise in the medium-term.

Sweden joins ZIRP club

Even in a subdued trading range something always moves. The trick is to seek out that one potential currency pair that will provide a market opportunity trade. While most investors have been board watching, waiting for the FOMC meet, it was the Swedish Central Bank that has provided this morning market opportunity.

The SEK currency (Kroner) is sharply lower after the Riksbank cuts its Repo Rate by -25bps to zero and pushed back its view of the first potential rate hike out until mid-2016. The market had been expecting a smaller trim, to +0.05%. The EUR/SEK surged from €9.27 to test near the €9.35 level, while USD/SEK is trading near its four-year high. Swedish policy makers have provided the market with forward guidance that will most likely keep their repo rate at these levels until inflation does pick up. This obviously was more “dovish” than the market was expecting and the reason why there has been a 17-big handle change on the currency pair since the Euro open.

Central Banks have markets by the throat

For the next ten day's monetary policy decisions dominate the asset class landscape – FOMC & RBNZ (Oct 29), BoJ (Oct 30), RBA (Nov 3) BoE & EUR (Nov 6). Even in a low rate environment it's difficult to anticipate “the” extraordinary move, just like Sweden's Riksbank. But, being aware of the potential to act accordingly is a big part of the battle. Traders are mostly interested in price movement – either up or down – as long as it moves it will provide opportunity. Investors on the other hand are concerned with returns and price appreciation or depreciation.

The Central Bank of Russia (CBR) is widely expected to raise interest rates at its regular meeting this Friday. Why? The country's annual inflation has already exceeded this year's ceiling. Nevertheless, market consensus believes that a tighter monetary policy may not be “strong” enough to stem the roubles rapid depreciation (RUB). Year-to-date the RUB has lost -21% against the dollar. Currently the CRB has been undergoing massive intervention to stem their currency slide. Nearly +40% of total daily volume can be attributed to the CBR. Therefor a +50 or +100bps hike is unlikely to stop the bleeding. The CBR needs to be more innovative in their approach as it's the market that is doing all the squeezing and not Russian policy makers.

Consolidation to dominate

It's difficult for the market to get too excited ahead of the FOMC announcement. Even the EUR continues to consolidate around optioned rate trigger points (€1.2700). Further consolidation for the 18-member single currency is expected around this psychological handle, especially given the whispered “several-yards” of €1.2700 expiries this week, mostly reported for Thursday. Implied vols are under pressure over the recent sessions. Nevertheless, risk reversals are still bid for EUR puts (implies general bias is still down), but what transpires at the FOMC will trump most expectations. There is a possibility that the market will want to retest the pre-spike vol lows before recalibrating the EUR's next substantial move. Investors still have some US data to chew on – durable goods, Redbook and consumer confidence – but most likely will not have the impetus to break the monotony of major forex ranges.