FXStreet (Guatemala) - Nick Lawson and Gaël Gunubu, analysts at Deutsche Bank AG explained that the long bond camp had been re-populated from a couple of months ago when the outlook was for US hikes and higher yields and confusion around the intent of the Fed and uncertainty around the liquidity of markets are now dominant themes.
Key Quotes:
"The Sep expiry (Europe and U.S.) is a week on Friday and the declines in spot levels over the last month has triggered a considerable amount of gamma hedging which will need managing over the next few days. This should support realised volatility over this period."
"By way of example, the 7% rally in the NKY this week was no doubt partly influenced by hedge management ahead of its own expiry which took place on today's opening rotation. Once the gamma kicks in, the momentum in either direction, can get carried away. This therefore increases the very short term risk around a surprise at next week's FOMC, coming just a few hours before the quarterly expiry. Even an in-line Fed could, under these conditions, create a surprisingly large reaction from the equity market due to these position adjustments."
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