Central Bank Decisions, Not G7, Seize Options Traders’ Attention

(Bloomberg) -- Euro-options traders seem little concerned by the impending G7 summit and have started placing their bets for when things will really matter: the Sept. 12 to Sept. 18 period.

That’s when the European Central Bank and the Federal Reserve will hold their policy meetings. Investors expect the central banks to be dovish, yet the extent of the stimulus they may provide remains in question. With some traders looking for a Fed cut of more than 25 basis points, and amid uncertainty about whether ECB President Mario Draghi will announce a major stimulus package once again, the market may find itself wrong footed. Options traders are taking no chances.

Demand to hedge against a big move in the euro over the one-month horizon remains near a two-year high hit in early June. This at a time when realized volatility in euro-dollar has eased considerably from recent highs, and implied volatility over the next two weeks stays low.

Investors could see key events in the coming days as a reason to seek haven through volatility exposure. The Jackson Hole, Wyoming symposium wraps up just as the Group of Seven summit kicks off on Saturday, and any headlines on trade or Brexit could excite the currency market.

Tired of Being a Dollar Bull? There Are Few Alternatives

Still, one-week volatility in euro-dollar only matched its year-to-date average ahead of Chairman Jerome Powell’s speech on Friday, even as a trio of policy makers sounded more hawkish than current market pricing would suggest.

For options traders, talk is cheap and it’s all about the action. And their bets come to reflect this.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

What to Watch:

• The Group of Seven Summit is held Aug. 24-26 in Biarritz, France; the Kansas City Fed wraps up its annual central banking symposium in Wyoming on Saturday
• Policy maker speeches next week include ECB Vice President Luis de Guindos, Bank of England policy committee member Silvana Tenreyro, Richmond Fed President Thomas Barkin, San Francisco Fed President Mary Daly
• Economic releases next week include euro area inflation, consumer confidence; U.S. PCE deflator, GDP; Sweden retail sales; Norway GDP, unemployment; see data calendar

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, William Shaw

©2019 Bloomberg L.P.