The EUR/USD currency pair has stabilised around 1.1050 following a surge in the US dollar driven by yesterday’s risk aversion. The limited movement in EUR/USD, trading in a narrow range within the mid 1.10s, can be attributed to long gamma positioning in the options market ahead of Friday’s crucial US non-farm payrolls data.
Long gamma positions are typically associated with an abundance of vanilla options, which have shorter-dated expiries and strike prices near the current spot rate. These positions are designed to hedge against perceived risks of increased FX realised volatility, particularly in anticipation of Friday’s NFP report.
The need to adjust cash hedges tied to these options to neutralise currency exposure as the spot market fluctuates can offset the cost of holding these positions and potentially generate profits if realised volatility exceeds expectations. However, a high volume of such positions also necessitates additional cash hedging, which can limit overall volatility and complicate cost coverage.
Dealers often respond by selling options to manage these costs, and recent activity has seen a notable increase in trading of pre-NFP expiry strikes, contributing to the current market congestion.
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