USD: Turning tide on the options market – Commerzbank

Signs of skepticism can still be seen on the options market. The latest statements by US President Trump regarding a de-escalation of the tariff conflict with China and the denial that he intends to fire Fed Chair Jay Powell have only slightly reduced the risks for the US dollar in the view of most market participants. Insurance against a sharp fall in the US dollar against the euro (EUR/USD risk reversals) remained at elevated levels yesterday despite the attempts at appeasement. This is accompanied by elevated implied volatility, Commerzbank's FX analyst Thu Lan Nguyen notes.

US economy may not overcome the current crisis easily

"The options market has thus also seen a clear break since 'Liberation Day'. The risks for EUR-USD have clearly shifted from a market perspective. The chart below shows the relationship between the 3-month implied volatility and the risk reversals for EUR/USD. Before Liberation Day, higher exchange rate volatility generally went hand in hand with higher risks for the euro. However, this has systematically changed since April 2. An increase in volatility has recently been accompanied by rising risks for the greenback."

"This once again demonstrates the extent to which the status of the US dollar is being undermined by the Made in Washington political chaos. Whereas investors had previously bet on an outperformance of the dollar against the euro in uncertain times, i.e. when stronger exchange rate fluctuations were to be expected, it is now the other way round. It may be obvious why this is the case: the undeniable source of the current uncertainty is located in the US."

"Let's remember the Great Financial Crisis of 2008/2009, which also originated in the US. Back then the US dollar appreciated significantly against the euro at times, acting as a safe haven. This was due not least to the belief in US exceptionalism, i.e. the ability of the US economy to overcome crises of all kinds more quickly than other economic areas. However, this is probably no longer the case, thanks to a US government that is prepared to inflict massive damage on the US economy. And as long as this is the case, USD investors must be prepared for rising hedging costs in times of increasing uncertainty."