Freaky December in FX

Freaky december. Thin markets, year end flows, low risk tolerance. This year the December risktolerance is the lowest in the last 15 years, for sure, probably the last 50 years, if not more.

This means wild correlation swings and correlation breakups, as witnessed so far this December.
Trading will wind down next week as most participants will have tried to complete whatever they needed to do this week. For those who for some reason are forced to do it beyond xmas up to new year´s eve, the transaction costs will increase sharply. Any such flow in decent size will most likely move the markets substantially.

Therefore, I do expect digital markets shaping up for next week. 1 or 0. On or off. Either extremely volatile, or absolutely nothing. I am shopping options wherever implied vol levels are not prohibitive in order to get part of any windfall profits to be had next week while celebrating xmas. Today, while starting off at decent levels, implied FX vols have become quite pumped post midday. Complicating further buying plans.
Tommorrow might be a different cup of tea with w/e and holidays affecting theta bills. We will see. I am already long options and will stay that way.

Over the last 5 years, violent trend moves established during December have rarely lasted long in the new year, unless slow and orderly pre new year´s. I do not expect this year to be an exception, rather more pronounced on the same theme. Thus, I would be wary of expecting the Euro strength to continue for long into 2009.

More on main trading themes going into 2009 tommorrow.






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