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FX options awaken amid volatility uptick

Spikes of volatility have appeared in FX markets in recent weeks, prompting speculation that a long period of dormancy in currency options might be coming to an end. However, reports of a forthcoming bonanza could be exaggerated, some analysts say.

The dollar last week took a breather from a 12-week rally, its longest positive move since at least 1971, and the US dollar index, which tracks the greenback against the currencies of six trade partners, fell slightly to 85.91, after reaching 86.75 the previous week, its highest level since June 2010.

The impact of the resurging dollar has caused waves of volatility, with emerging markets currencies, the euro and Antipodean dollars moving out of their ranges. The Australian dollar declined around 7% against its US counterpart in the month to October 7, while the euro hit a two-year low of $1.2571 as it came off its worst quarter since 2010, and the yen has broken out of its 20-month range against the greenback. “Probably the most impressive move in terms of volatility has been in emerging markets and in Australia, where investors have seen a lot of reasons for the Ozzie to weaken,” says Olivier Korber, Paris-based FX and derivatives strategist at Société Générale. “It didn’t happen for a long time and the market didn’t understand why the Ozzie was so resilient, and then all those expectations were fulfilled in a short time and the options market reaction has been quite spectacular.”

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