Euro: Options show benefits from US policy doubts – Commerzbank

Commerzbank’s Michael Pfister examines European dollar options, highlighting how positive risk reversals have returned after remarks from the US Treasury Secretary. He asserts that the extended period of favorable EUR/USD risk reversals likely constituted an anomaly, and the euro typically benefits when US policy uncertainties arise, as evidenced by present risk reversal pricing.

Initial post-Iran war volatility saw risk reversals revert to pre-Liberation Day levels, driven by heightened hedging demands against further US dollar appreciation, partly stemming from the euro zone’s greater vulnerability to oil and gas supply disruptions. Nonetheless, as the conflict persisted or concluded, market movements reverted to slightly negative risk reversals (signifying hedging against US dollar strength) while implied volatility remained low, aligning with pre-Liberation Day dynamics.

The period from early April last year to February’s end appears to have been an exception rather than the norm, given the persistent positive EUR/USD risk reversals observed. While the relationship’s clarity remains debatable, an assumption based on political cues from the US is inferred, though substantiated by data would be challenging.

However, recent clues—such as the US Treasury Secretary’s statement—showed risk reversals rebounding into positive territory. The forex market might still be recollecting the uncertainty post-Liberation Day, implying that sustained doubt over US policy tends to favor the euro, a phenomenon reflected in risk reversals.