The foreign exchange market is starting to see moves to prepare for a return of volatility. Implied volatility gauges for major currencies over the next month have edged higher in recent weeks, and one-year euro-dollar implied volatility has also ticked up from 2022 lows. Meanwhile, one-month euro-Swiss franc implied volatility remains near its lowest in over a decade. Barclays strategists point out that the current disconnect between low volatility and the market environment is unlikely to persist, flagging the potential for a rise in FX volatility, and recommend buying products that can profit from wider swings in the euro-dollar pair. Among short-term traders and interbank trading desks, there is growing interest in trades that benefit from a volatility spike, as hedging costs are seen as cheap relative to the risks. Short-dated option hedging costs for the euro and the pound have already bottomed out this week and started to rise, as the options market begins to price in the US consumer price index data due on the 14th.
Barclays PLCBarclays strategists recommend buying products that profit from wider euro-dollar swings, and rising hedging demand benefits Barclays' FX derivatives business.