CORRECTED – FOREX-U.S. dollar down vs yen; FX options flag QE worry

(Corrects 2nd paragraph to clarify GDP data was for third
quarter)

* FX options market flag anxiety

* Solid option barriers at 80 yen

* Focus remains FOMC and likely monetary easing
(Recasts, adds quotes, byline, outlook, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 29 (BestGrowthStock) – The uncertainty surrounding a
fresh round of U.S. monetary easing has weighed on the dollar
on Friday and prompted investors in the options market to hedge
against any volatility arising from it.

The dollar fell against the yen, just shy of a 15-year low
hit on Monday, with lackluster U.S. GDP data in the third
quarter failing to shake expectations of further stimulus for
the economy. Quantitative easing is viewed as negative for the
greenback as it increases the supply of dollars in the
financial system, diminishing its value For an economy wrapup,
click on [ID:nN28207235].

At the same time, signals emanating from the currency
options market on Friday are flagging concern about next week’s
events, which also include U.S. elections and a non-farm
payrolls report for October.

“There’s a little anxiety in the market and this may be
about quantitative easing,” said Simon Smollett, senior
currency options strategist, at Credit Agricole in London.

“This may also be about the fact that most currencies have
been overbought against the dollar. There is a whole load of
factors here and the bottom line is that the ‘risk off’ hedging
behavior has crept back into the market even if the price
action in spot has been relatively modest.”

One important gauge showing increased worry is the
euro/dollar risk reversal, a barometer of currency sentiment,
which is indicating a decline in the curve or a growing bearish
view on the currency pair.

The euro this past year has become a proxy for risk
appetite in the developed world, rising when there is increased
risk-taking in the market and falling when investors become
averse to risk.

The single currency’s “put” bias has deepened. On Friday,
puts are being traded at a mid-market of -0.925
vol(EUR1MRR=GFI: ), according to GFI data, with bids at -1.30.
This was a steep drop from bids of -0.55 vol on October 14.

“There is clearly an interest to buy the downside in
euro/dollar. The market seems to be warning of a move lower in
spot (price of the euro),” Smollet said.

Euro gains so far this month have slowed to around 2
percent from a steep 7.5 percent rise in September. On the
week, the euro was down 0.3 percent, its worst weekly
performance since mid-September.

RISING PUTS, IMPLIED VOLS

The options market has also been increasingly wary of the
Australian dollar, the euro versus the yen, and Korean won,
currencies that thrive in global expansions and rising equity
and commodity markets. Their risk reversals have shown
increasing put bias as well.

Implied volatility, another market sentiment gauge, has
also spiked in recent sessions. One-week euro/dollar vols have
gained over 4 vols the last couple of days to hit the 17.0
handle on Friday although one-month vols remained confined in
the upper-13 range.

Sone analysts suggest nervousness about quantitative easing
seemed misplaced since most believe the Federal Reserve will
err on the side of caution and announce next week a figure that
is more in line with market expectations. According to a
Reuters poll, most leading economists expect the Fed to buy
between $80-$100 billion worth of assets per month. See
[ID:nNLLRLE6LL].

“The FOMC might end up with a QE3 and a QE4 if the economy
really sours, but it can’t reasonably announce much more than a
half-trillion for QE2 at this point,” said Avery Shenfeld,
chief economist at CIBC World Markets in Toronto.

“Expectations for more than a trillion in one fell swoop
have rightly dwindled so we don’t see much of a market shock
from the coming week’s Fed announcement.”

On the other hand, U.S. congressional elections on Tuesday
could have implications for fiscal policy and Shenfeld thinks
the market could well focus on this vote instead of the FOMC.

Online prediction markets suggested that Republicans have
an overwhelming 90 percent chance of taking the House of
Representatives. A Republican victory in next week’s U.S.
mid-term elections should be positive for the dollar, Westpac
senior currency strategist Richard Franulovich said.

The Republicans, he said, have been campaigning on a
platform of fiscal prudence and this is a “confidence-building
event” for the dollar because it undermines the long-run
bearish arguments against the greenback with respect to
structural imbalances.

(Additional reporting by Nick Olivari)
(Editing by Theodore d’Afflisio)

CORRECTED – FOREX-U.S. dollar down vs yen; FX options flag QE worry