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Rising sensitivities in FX

There’s a real sense that pressure is building in the market. As Neil Mellor from Bank of New York Mellon wrote in research on Tuesday, the recent price action has, “highlighted the foreign exchange market’s sensitivities.” Reading through much of the excellent research I get sent, it seems clear that there are no easy explanations for some of the price gyrations, which you’d expect in the era of relative devalue trading.

Plausible arguments can be made for both why the EUR – and any other currency – might rise or fall. And the influencing factors are increasing in number. This week, we’ve heard plenty of noise about China and other Asian countries’ USD reserves and what the US will do to maintain their value. There’s also been plenty of talk about the rise and then fall of commodity currencies, higher bond yields, as well as what looks to be a looming crisis again in Central and Eastern Europe and whether or not some big M&A deals will go through.

The upshot is that the market is very whippy. “People are worried about taking too much risk, but they are happy to sit long options to have plenty of gamma if things start moving, even though realised vol isn’t as high as implied,” says one option trader in London.

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