Dollar Shorts Cut as Traders Brace for Hawkish Fed Surprise

Jun 16, 2021

Observations & Insight

Congratulations to Marc Berman, Eugene Colter, Carol Kennedy, Mary Minow, Annette Nazereth and Eric Noll, who have all been named to the Advisory Board of Options Solutions. — Options Solutions

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Lead Stories

Dollar Shorts Cut as Traders Brace for Hawkish Fed Surprise
Susanne Barton and Robert Fullem – Bloomberg
Investors are trimming bets against the dollar ahead of the Federal Reserve decision Wednesday over fears that a hawkish policy tilt is being underpriced, leaving bears to once again wrestle with a resilient greenback.
The Bloomberg Dollar Spot Index traded near the highest level in two weeks. Meanwhile, risk reversals — which measure the balance between put and call options — indicate that sentiment is the most bullish since April.

Record Run in Emerging-Market Currencies Is Now Stirring Worry
Netty Idayu Ismail – Bloomberg
After a 13% advance from post-pandemic lows to a record high, the rally in emerging-market currencies looks to be fizzling out.
Gains in the South African rand — this year’s best performer — have stalled. Options traders are adding to bearish wagers on the Russian ruble despite hawkish comments last week from the central bank chief. And the Chilean peso suffered its biggest drop in three weeks on Tuesday as a rout in copper prices dims the outlook of the country’s terms of trade.

Options Solutions Appoints Advisory Board
Options Solutions
Options Solutions LLC, a specialized, asset management firm that was created to help high-net-worth investors add conservative options strategies to their portfolios, has appointed an Advisory Board. The Advisory Board will advise senior management on issues that are critical to the company and its clients, providing additional expertise and insight.

*****JJL: They put together quite the team.

Lumber prices reverse early slide, but pandemic-driven boom shows signs of weakness
Will Daniel – Markets Insider
Lumber prices slid again on Tuesday before mounting a recovery as the pandemic-driven boom in the commodity continues to show signs of weakness.
Specifically, lumber futures fell as low as $944 per thousand board feet on Tuesday before recovering above $1000. The recovery helped lumber avoid the 10th straight down day for the hot commodity.
Lumber’s recent rise has been so dramatic that prices are up roughly 170% since this time last year even with the recent down trend.

China hog futures fall to record low on fears of pork glut
Hudson Lockett and Thomas Hale – Financial Times
Hog futures in China have fallen to record lows as mass slaughtering of pigs prompts fears that the world’s second-biggest economy faces a deluge of pork.
Rising concerns that the local pork market is becoming inundated have led to a more than 30 per cent fall in Dalian-traded hog futures, which allow investors to bet on the future direction of prices, since they were launched in January.

Opinion: If the SEC OKs bitcoin ETFs, it would be encouraging the most obvious speculative bubble in modern times
Roger Lowenstein – MarketWatch
One of the most misleading statements, if not an outright lie, about cryptocurrency is that people invest in it.
No one has ever invested in bitcoin BTCUSD, -3.29%. They speculate. This is a distinction that Gary Gensler, chairman of the Securities and Exchange Commission, should keep well in mind when the SEC rules on a pending application for a bitcoin exchange-traded fund proposed by VanEck.
An SEC decision could come in June. If the regulator greenlights VanEck, bitcoin will be significantly more available to retail folks.

Brace for huge oil volatility, U.S. trading group says
Noah Browning and Julia Payne – Reuters
Oil prices are likely to be extremely volatile in the next few years, driven by supply constraints rather than demand as financing for new production evaporates in favour of renewables, U.S.-based Castleton Commodities International said.


Ten global clearing firms make strategic investment in FIA Tech
Newly capitalized firm aims to bring greater efficiency and resilience to the markets
Washington, DC — Today, FIA announced an investment of $44 million by ten leading clearing firms to fund the strategic growth of FIA Tech. The capital raise will advance FIA Tech’s efforts to bring innovative solutions to the derivatives industry.
The newly capitalized FIA Tech will be investing to further the development of existing products that have successfully served the industry and launch innovative new solutions to improve market infrastructure across the listed and cleared derivatives industry.


Opinion: It’s time to be smart like Soros in the ‘blow-off’ stage of the bull market in stocks
Cody Willard – MarketWatch
I don’t know when what I call the Blow-Off Top of the Bubble-Blowing Bull Market will end.
After 12 years being long and strong and having diamond hands without even knowing that term existed, maybe I’m wrong to turn more cautious.
Maybe the economy will reopen and rejuvenate the country in such a strong manner that corporate earnings in 2022 and 2023 will make today’s prices seem like bargains.
But I simply don’t think that’s the most likely outcome.

BUZZ-COMMENT-Forward looking options flag extent of Fed risk to FX
Reuters via Nasdaq
Options thrive on volatility, using implied volatility to gauge how much over a given time frame, so gains in overnight/next day expiry implied volatility since Tuesday will flag the options market’s perceived Fed risk to FX.
The biggest implied volatility increase in the G10 pairings is AUD/USD, but expiry also captures a speech by RBA Governor Philip Lowe, and local labour data. From 10.0 on Tuesday, it’s 14.5 Wednesday – a break-even for simple vanilla straddles of $47-pips, from $32-pips in either direction. There’s been increased demand and higher levels for downside strikes.


What is the VIX? How to use the volatility index in your trades
Rebecca Cattlin – City Index (UK)
The VIX is one of the most widely-used measures of market volatility, for both the S&P 500 and wider stock market. So, what is the VIX, how is it calculated and how can you take your first position on volatility? Find out below.
What is the CBOE Volatility Index (VIX)?
The CBOE Volatility Index – more commonly known as the VIX – is a real-time index that tracks the market’s expectations of changes in the S&P 500. It’s an important benchmark for market risk, stress and sentiment, which is why it’s often referred to as the ‘fear gauge’.

****SR: This story is a pretty basic introduction to the VIX, but those who are newer to the game or anyone who could use a refresher might find it useful.


Traders See Carbon Becoming Bigger Market Than Crude Oil
Will Mathis, Vanessa Dezem, and Ewa Krukowska – Bloomberg
The world’s largest oil traders are gearing up to profit from buying and selling pollution permits, a market that could become bigger than crude as global leaders seek to limit the impact of climate change.
The global carbon market has the potential to be 10 times the size of crude oil trading, said Hannah Hauman, global head of carbon trading at Trafigura Group, the second-largest oil and metals trader. Hedge fund Andurand Capital LLP — historically known for its fossil fuel bets — expects the cost of polluting to double before some new emissions-cutting technologies kick in.

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Past Options Newsletters

The Spread – July 30, 2021

The Spread – July 30, 2021

Earnings season in full bloom; Options lead year-to-date derivatives volume; Robinhood’s IPO; John gets real with Get Real VR: Conflicting factors underpin volatility; Cboe cleared for fall European competition; and the Cboe Options Institute’s Kevin Davitt talks about vega in this week’s “Term of the Week.”

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