Just like any other year, we find ourselves in a choppy and illiquid trading condition at this time of the year...December. But some differences have been pointed out this year and one that is standing out is currency options market.
It is almost a market convention among seasoned option traders that one is supposed to choose between the two traditional positionings, long gamma/short vega or short gamma/long vega, going into X'mas and new year holiday season.
If you think the market will stay choppy but rather trendless through this period, you tend to err upon the former while if you expect a seasonal consolidation in a well-defined trend, you choose the latter strategy. The former flattens and the latter steepens the volatility curve accordingly.
What is being happening this year is like having them balanced out or taking place at the same time.
Consistent demand for gamma and sustained calls for longer term vega offer themselves one after another eventually taking the whole curve of volatility higher. This is not a familiar tug of war between steepening and fattening of the curve usually seen at this time of the year.
This is of course subject to many interpretations but with a little help from some additional information of specific interests and risk reversal spreads in the market, one educated guess could be a strategic positioning for sustained depreciation of JPY that more and more come to believe could materialise sooner rather than later.
JPY is likely to be a currency of interest for many players now and it is more so in 2010 FX forecasts recently published by many influential sources, many of which clearly expect much weaker japanese currency down the road.
It has been the case in the past that sustained JPY depreciation should come after a steep appreciation of the currency and currency options market( volatility market) has always been among the first to get hold of early signals for a eventual turnaound.
Now it brings us to a simple but familiar question," Is this what we saw before?".
The clear-cut answer may be either just around the corner or months ahead and till then we will keep wondering if JPY is a suspect hiding or a hostage help in the deep forest of currency trading.
