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FX Options Weekly

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Macro and Vol Commentary

The correction to the downside was needed, but can gold return to the highs we saw during August?


  • Known holdings of gold ETFs are have gained 33.2% to 110m oz, despite the sell-off, holdings have continued to rise. This suggests that speculators still believe prices will continue to increase in the coming months
  • The mass stimulus from the central banks and governments has provided support for gold, there is no sign of let-up from central banks
  • Monetary policy will remain accommodative, and this should continue to support gold
  • Central bank balance sheets as a percentage of GDP have increased significantly in 2020
  • BOJ stands at 128% of GDP as of August 31st, up from 104.5% in January
  • The ECB balance sheet is 57.2% of GDP, up from 39.2% in January
  • The Fed balance sheet is 33.5% of GDP as of August 31st, up from 19.2% in January
  • BOE stands at 35.5% of GDP as of August 31st up from 21.5% in January
  • Inflation worries, in the long run, could provide further support for gold but we anticipate we will see this inflation in hard assets. If funds fail to reach the end consumer, CPI could remain muted, similar to the Japanese model
  • Bond yields are low and the curve has flattened with US treasuries trading a narrow range. This could fuel flows into gold and we did see some strong buying as gold corrected
  • Total negative-yielding debt has trended well in recent years, the negative-yielding debt stands at $15.4trn just off the highs for the year at $16.209m, the all-time high was last year when debt reached $16.838m
  • The BOE is said they are considering negative rates and this may prompt UK treasuries to become negative
  • The CFTC managed money net position stands at 131,089 contracts, which is fractionally above long term average back to 2008 which stands at 126,782. The maximum net length stands at 292,066 and we could see the net length start to be rebuilt
  • Uncertainty surrounding the global economy also has a supportive tilt to gold, but there is evidence to suggest that the U.S. economy can bounce back quicker than the Euro area
  • We expect positive economic data in 2021 to provide headwinds to gold
  • The dollar has been integral to gold's performance, interestingly gold has traded as a safe haven in recent months
  • As soon as we saw cases rise in Europe and uncertainty increase we saw a flight to the dollar and gold sold off
  • Continued uncertainty remerging in the global economy presents downside risks, but once the dust settles the case for gold remains strong
  • The dollar has also reduced industry cash costs, according to Mckinsey 1st, 2nd, and 3rd quartile unit costs have decreased by 14%, 8%, and 7% respectively
  • Mines in locations where the currencies have not weakened against the dollar have been the worst impacted
  • The US election on the horizon is a key risk event, another Trump Presidency could trigger the dollar to weaken and continue the recent trend. Conversely, a Biden Presidency could mean a more favourable trade deal with China
  • The environment for equities is supportive and we expect stocks to trend higher which may also provide headwinds to gold
  • Central Banks gold reserves have been increasing significantly in recent months, with China and Turkey increasing their holdings through to May 2020

We expect the upside momentum to continue in the near term, but flights to the dollar as uncertainty re-emerges could increase headwinds. From a monetary policy perspective, gold should continue to rally. The CFTC net position suggests there is potential for investors to increase their longs, and we expect gold to trend higher in the coming months back towards $2,000/oz.

Volatility Commentary

General Comment

The last week has had a reversal of the recent weakness in USD as a slight risk of sentiment creeps into the market with indices like the S&P having receded. FX Macro Vols remained steady though we expect to see moves in spot and vol in GBP into October with a deal/no-deal decision expected by the 16th Oct and following into the Nov/Dec we may see macro vols extend with the US election in Nov potentially to be disputed by President Trump/GOP

XAUUSD comment

The beginning of Aug saw XAUUSD hit a year high though XAUUSD slowly came off and the last weeks of Sep saw a further decline with USD has reversed some of the recent weakness. In the short term, it looks as if the “Cash is King” argument may have driven some of the recent XAUUSD weakening at a time when one may otherwise expect XAU to continue strengthening given the current macroeconomic uncertainties (Coronavirus, US election, US-China trade, UK-EU transition period ending). We see the potential for short term continuation of this trend but with many of the issues the macroeconomy is facing, alongside such widely expansionary policies by the Fed (alongside most major Central Banks) we’d expect to see a strengthening XAUUSD in the medium/longer term. We favour being slightly long vol/gamma, though with historic volatility having recently been lower than implied we would favour trades with features lowering upfront premium bearing this in mind.

Trade Idea

  • Buy 3 month KI Call with KI Barrier at 1825 and strike at 2025
  • Upfront premium cost, when priced in 5kOz XAU (10m 10.125m USD Equiv notional), is circa 53k USD
  • For reference, the vanilla equivalent is circa upfront cost of premium 150k USD

XAUUSD 1-month Implied and Realised Volatility

Positioning Charts 

There is a clear split between positioning data for September and August. In chart 2, there was limited downside cover and this suggests the options market could have got caught. Upside calls with a large notional value suggest options traders expected the further gains. In chart 1, there was more appetite for put options with a wide range of $1,800/oz-$1,950/oz. The majority of expiries are for the next month, however, the upside calls with a strike around $2,100/oz have an expiry towards January. This could indicate spot prices edge higher in Q4, but these volumes were light. 

XAUUSD  August 29th and September 29th 

XAUUSD  July 29th and August 29th 

USDBRL NDO Positioning Data 22/09/2020 - 29/09/2020

Options executed in the last week for USDBRL are sporadic. There is a cluster of options executed around spot. However, there are some put options with large notional values below the market, this could prompt correction to the downside in the near term. Upside cover is weak, the lack of volumes this week suggest indecision in the market with investors lacking conviction. 

USDCNY Vanilla Options Positioning Data 22/09/2020 -29/09/2020

USDCNY volumes suggest a mild bias to the upside in the immediate term shown by the cluster of options up to 7 with an expiry between now and October. Put options are around the spot market have an expiry with marginally later than near dated call options. Notional values after the US election have started to increase and we expect this time frame to become more prominent. We anticipate the market to consolidate in the next week, with the options market suggesting little change to the current outlook. 

Charts and Tables

FX Expiries

Volatility Grid


Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Technical Analysis 

JP Morgan Global FX Volatility Index 

The index has broken back below trend support and the 100 DMA at 9.50. The indicators are falling towards the 200DMA at 9.30, a break of this level could pave the way for a challenge of 9. The MACD diff is negative and diverging and this helps to affirm sentiment in the market. On the upside, the index needs to gain a footing above 9.50, the recent high is the psychological level at 9.85 and this could set the scene for a test of 10. The indicators looked primed for a correction but if the index corrects to the upside but fails into previous trend support, we could see the market trend lower. 

Dollar Index

The index has failed above trend resistance and this could trigger losses back to the 50DMA at 93.973. The stochastics are falling and the MACD diff is negative but is converging on the downside and this could set the scene for higher prices back to trend resistance. The stochastics are rising and the buy signal and reaffirmation of support strengthens the outlook on the upside. The two inverted hammer candles need to be confirmed, to do this, the index needs to take out-trend resistance and then challenge 95. On the downside, rejection of prices around trend resistance could trigger losses back towards 93.50. To confirm the outlook of the index weakening in the long term, the index needs to break below near term trend support. A breach of this would confirm the break out of the symmetrical triangle. 


Gold prices have found weakened since failing above 2050, this caused a test of support at 1848. Prices have rallied but have since failed into the 50 DMA. The stochastics are falling and have given a sell signal, as the MACD diff converges on the upside. We anticipate prices to push back towards trend support at 1858. In order to confirm the outlook of higher prices, prices need to take out 1900 and the moving averages at 1919 and 1934 before near term trend resistance. A breach of this level could trigger a breakout of this level and re-challenge 2000. 



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A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

Please contact the author should you require a copy of any previous reports for comparative purposes. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Data in this report has been sourced from Bloomberg unless otherwise stated. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy.

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