Insights 
VT 
The US government shutdown has ended, but it has not immediately impacted the FX markets. Key data releases, such as October payrolls and CPI, are unlikely to be available soon, keeping market volatility low.
Despite the subdued market activity, some signs indicate potential future movement. The 1-month implied volatility of G10 currencies is trading 1.1 vol above realised volatility since early April, suggesting anticipation of a data-driven shake-up. There is also an increase in open interest on bullish Treasury options.
Softer US Economic Forecast
A softer US economic forecast could lead to dovish shifts in Federal Reserve policies. This could cause changes in front-end rates and affect the dollar. December rate cuts have only 15bp priced in, suggesting the possibility of further impact on FX markets.
The FXStreet Insights Team, a group of journalists, compiles market observations from experts. The content is informational and does not serve as investment advice. Readers are encouraged to conduct thorough research before making investment choices.
With the US government shutdown now behind us, the market is in a strange state of calm. Key data like the October payrolls and CPI reports are delayed, leaving traders without the usual signposts to guide them. This lack of information has kept currency movements very quiet for now.
The options market, however, is telling a different story by hinting that a significant move is coming. We are seeing implied volatility—the market’s expectation of future price swings—run well ahead of the low realized volatility of the past month. This is a clear signal that traders are buying options to protect against, or profit from, a data-driven shock in the weeks ahead.
Potential for Sharp Move
Our view is that this eventual move will be driven by a weaker US dollar. Traders are piling into bullish Treasury options, which is a bet on falling interest rates and suggests they expect the delayed economic data to be soft. Recent indicators support this, with the latest ISM Manufacturing PMI dipping to 48.9 in October, signaling a contraction in the sector even before the shutdown’s full impact is known.
Derivative traders should therefore consider positioning for a spike in volatility and a falling dollar. Buying call options on pairs like EUR/USD or put options on USD/JPY are sensible strategies, as they would benefit from both the expected price direction and the rise in volatility itself. This setup is reminiscent of past periods, like after the 2013 shutdown, when delayed data created an information vacuum that was followed by sharp market adjustments.
The potential for a sharp move is high because the market has not fully priced in a dovish shift from the Federal Reserve. Fed funds futures currently imply only a 60% chance of a 25 basis point rate cut in December. If the delayed data confirms a slowing economy, we expect a swift repricing that would send the dollar lower.
