MACRO hedge funds are increasingly seeking currency option trades that exclude the US dollar as they navigate the market turbulence stemming from worries about the US economy.
Trades involving the euro and haven yen were in demand on Monday (Mar 10). The two currencies were easily the most traded on The Depository and Trust Clearing, involved in over half of all trades, as US tech stocks tumbled by the most since 2022.
Option data shows long euro positions are the highest since 2020, Morgan Stanley strategists including Zoe Strauss and David Adams said in a note on Monday. That’s after the euro surged following German Chancellor-in-waiting Friedrich Merz promising to unleash German spending power.
The attraction of trading the euro and yen may have been aided by Federal Reserve chair Jerome Powell signalling the US central bank is in no hurry to cut interest rates. Meanwhile, the threat of US tariffs next month may see numerous currencies back under pressure.
Trading the euro against Asian and commodity currencies has “piqued a lot of interest from the macro hedge-fund community,” according to Mukund Daga, head of foreign-exchange options for Asia at Barclays Bank in Singapore. He has seen interest pick up in trades involving the euro against the Australian dollar, Canadian dollar and the offshore yuan.
Nomura International has seen derivatives around the euro versus sterling and the Swiss franc also become popular, according to Sagar Sambrani, a senior foreign-exchange options trader at Nomura in London. Euro-dollar option trading volume on DTCC on Monday was more than 60 per cent below its peak last week on Mar 5, while euro-sterling option trades represented a bigger percentage of trading volume when comparing the two dates.
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The decline in demand for euro-dollar options may be fuelled by how last week’s move in the pair affected the option market.
“Following the EU defence spending headlines we saw a large rally in euro-dollar spot in conjunction with strong interest to own topside via vanillas and digitals,” said Jamie Sanders, director of FX options trading at RBC Capital Markets in London, referring to two types of options.
“This caused a weighted move higher in implied volatility, and front-end skew to move right very quickly. The move felt somewhat exaggerated,” he added.
Trades involving the yen versus currencies other than the dollar were also in demand.
“While the momentum for a stronger yen has abated somewhat and implied volatilities remain elevated, the continued weakness in equities is driving further interest for downside structures” for other currencies versus the yen, said Sambrani.
He said trades that look to reduce the initial premium paid to purchase the options are favoured. BLOOMBERG
