BOJ Governor Ueda Meets Key Ministers as Markets Eye Policy Shifts Under New Leadership 
Indonesia Aims to Strengthen Rupiah as Central Bank Targets 16,400–16,500 Level 
Goldman Predicts 50% Odds of 10% U.S. Tariff on Copper by Q1 Close 
EUR/USD Smashes 1.1660 as ADP Jobs Massacre Crushes the Dollar 
Citi Sets Bullish 2026 Target for STOXX 600 as Fiscal Support and Monetary Easing Boost Outlook 
Japan’s Inflation Edges Higher in October as BOJ Faces Growing Pressure to Hike Rates 
New RBNZ Governor Anna Breman Aims to Restore Stability After Tumultuous Years 
UBS Predicts Potential Fed Rate Cut Amid Strong US Economic Data 
Airline Loyalty Programs Face New Uncertainty as Visa–Mastercard Fee Settlement Evolves 
China’s Growth Faces Structural Challenges Amid Doubts Over Data 
Japan’s Finance Minister Signals Alignment With BOJ as Rate Hike Speculation Grows 
Following some rather dull trading days, USD traders had actually hoped for today’s semi-annual hearing of Fed Chair Janet Yellen in front of Congress to bring some life into the exchange rates. But then things happened in rapid succession yesterday - to the dollar’s disadvantage.
The focus of USD investors rests mainly on monetary policy again. Following yesterday’s comments of FOMC board member Lael Brainard a Fed timetable seems to be increasingly emerging that corresponds to the one long since favored by us: the Fed is likely to announce the imminent end of the reinvestments from the QE programme in September.
No clashes with low-intensity jitters continuing through this month as the position shakeout in duration-heavy bond markets play itself out; indeed, the recent FX price action is very much in line with our baseline 2H’17 view of a moderate turn higher in vol. At the same time, however, we are skeptical that the ongoing bond sell-off will morph into a more sinister trigger for risk markets.
That said, these are not placid markets and there are a couple of lessons to be gleaned from the pattern of recent vol returns that can prove useful for defensive option plays:
Gamma is performing solidly, and comfortably outpacing vega (refer above chart), which is to be expected when markets go into a pothole with ultra-low levels of frontend vol and steeply upward sloping vol curves. Vol curve flattening was indeed one of our core views for H2, and the upbeat performance of vega-neutral, long gamma calendars supports our conviction in employing them as defensive vehicles.
The currency bloc breakdown of gamma returns in the above chart is divulging. EURUSD and EUR/EM are the best-performing currency pairs, while USD/EM, GBP, and AUD-crosses have been disappointing. In general, owning gamma in USD - pairs and EUR - crosses - the two currencies at the heart of the rate normalization dynamic - appears to be a decent rule of thumb. The underperformance of USD/EM as a bloc is surprising and illustrates the wide dispersion in EM FX behavior.
