Is the sharp increase in put prices a sign of EUR/USD correction?
EUR/USD has been trading within a wide range since mid-January, as investors remain sceptical about further gains. After hitting 1.2537 on January 25th, the single currency has been grinding lower and moved as low as 1.2206 before stabilising at around 1.2320.
Looking at the option market, one can notice that the price of put options have increase steadily since January 2nd, especially for shortest term maturities, which tends to suggest that market participants are bracing for a correction in EUR/USD. The 1-week 25-delta risk-reversal measure hit -0.6375% yesterday, while the 1-month one stood at -0.7725%, compared to 0.22% and 0.2625% on February 2nd, respectively. For now, the sharp increase of put prices has not affected the spot market. However, this price divergence tends to suggest that investors are positioning themselves for a stronger US dollar. Indeed, the next couple of months will be key as the Fed, which has a new boss, Jerome Powell, is expected to lift interest rate in March. In addition. Rising inflation pressure in the US has forced investors to revise their rate hike expectations to the upside.
World markets recover after big drop
Following recent market drop, we see extended improvement on markets for the current week. MSCI World Index increased by 1.22%, closing at 2’076 points, its highest rate hike since April 24th 2017, supported by Materials (+1.79%), IT (+1.67%), Energy (1.64%) and Industrials (1.20%) sectors. US markets extended Friday’s gains, with the Dow Jones Industrial Average surging at 24’601 (up 410 points or +1.70%), heading toward hourly resistance at 25’293 (February 7th 2018 high) while S&P500 2’656 (+1.39%) and Nasdaq 6’981 (+1.56%) have similar rising momentums. On European side, Euro Stoxx 50 surged at 3’368 points (+1.27%), slowly recovering from last week’s selling pressures (last week performance at -5.60%). German DAX and French CAC40 increased by +1.45% and 1.20% respectively. Asian markets follow the same path for the most part, Hong Kong Hang Seng currently quotes at 29’878 (+1.35%) while Korean Kospi and Australian S&P/ASX200 both increase at 2’395 (+0.41%) and 5’856 (+0.60%). Japanese markets remain lagers, as Nikkei 225 is down at 21’245 (-0.65%) following Shinzo Abe announcement on Friday to reappoint Kuroda for a second term as chief of the Bank of Japan, whose monetary policy consists of maintaining monetary policy loose for the time being, thus as a consequence reducing pressures on Japanese yen (USD/YEN at 108 or -0.62%).
US 10 years Treasury yields currently react inversely as they increased by +0.25% during yesterday’s closing and decreased by -0.32% this morning, currently valued at 2.8494 (US 2 years treasury up 0.40% since yesterday, estimated at 2.0815). 10 years US – German Bund spread remains at 1.32% (0.91% 6 months ago).
Bloomberg commodity index surged at 86.33 (+0.80%) and is currently given at 86.67 (+0.40%).
Looking forward to tomorrow’s January Consumer Price Index (expected at 2%) and Japan 4Q GDP, we believe these data are core as to determine how markets will react in the coming days
