Traders Bet ‘Insane’ Currency Volatility Is Here to Stay

(Bloomberg) — Currency traders are positioning for turbulence in currency markets to get even worse as an escalating trade war shakes up the global economic order.

The dollar and its peers have been whipsawed by some of the sharpest price swings since the 2008 financial crisis, as conflicting tariff messages from US President Donald Trump keep markets on edge. Options volumes surged to a record last week and uncertainty around the trade war has now pushed expectations for volatility in the next month to a two-year high.

“Volatility in FX has been completely insane,” Brent Donnelly, president of Spectra FX Solutions LLC., wrote in a note. “We saw one of our biggest weeks ever on the trading side as volumes are gigantic and everyone is doing all kinds of stuff.”

The $7.5 trillion-a-day currency market has been jolted awake after a long stretch of calm. Increased volatility since Trump’s reelection has already made FX more profitable, leading firms such as Optiver and Citigroup Inc. to expand trading teams. That looks well timed as the latest tariff headlines are creating extraordinary moves.

The greenback posted its worst intraday drop since 2009 last week, followed the next day by a plunge in the Australian dollar that rivaled its selloff in 2008. If currency options are any guide, traders should get used to this level of chaos.

Demand is soaring for derivatives that pay out if currency moves break even further out of their recent ranges. So-called 10-delta flies — a popular way to hedge for sharp two-way moves — have jumped to three-year highs in the euro, Australian dollar and Swiss franc. They reached their highest levels in two years in the pound and Norwegian krone.

Market Shift

Traders use a myriad of factors to assess these exchange rates, from the differences between interest rates and deficits to the risk outlook and market positioning. The trade war is now threatening to upend economic relationships and monetary policy in ways that will be hard to predict. 

While other markets have also seen huge swings in recent days — with futures showing elevated volatility in S&P 500 stocks may persist for months — there’s been a significant shift in the dynamics for currencies. FX volatility since the US election is outpacing that in rates for the first time in the post-pandemic era. In recent years, shorting volatility was a more likely bet.

Now the sharp rise in both common and more remote option wagers shows traders are preparing for bigger market swings to become the norm — and also protecting themselves against the chance of extreme moves.

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