Hawkish DM monetary policy surprises this week may spur 1-2 weeks of decent realized volatility but are unlikely to be durable enough to upend placid option pricing through the summer.

Option implied USD-correlations are near multi-year lows of a disciplined long-term range, which has historically signaled a flat-lining of prevailing USD trends for the next two months. Fade historically low EURUSD vs. TRYUSD correlations via weighted EURUSD vs. EURTRY 1Y vol spreads.

While USD-based correlations implied by FX options are testing multi-year lows.

There were some stirrings of life in FX options markets this week, helped by two developments that have potentially taken us one step closer to a pause in the never-ending stretch of vol declines since the beginning of the year.

First, with the passage of the June FOMC, the last major event risk of the month is out of the way, and there is precious little event risk premium left to squeeze out of the front-end vols. On a forward basis, vol curves are almost flat – the average USD/G7vol curve prices in only a measly 0.4 vols of recovery in 1M ATMs over the next two months from current bargain basement levels in the high-6s (refer above chart) – reflecting a market priced for the onset of summer doldrums.

Second, DM monetary policy took a surprisingly hawkish turn this week, with the Fed, BoE, and BoC all catching markets off guard. Coming against the backdrop of solid YTD risk-asset performance and underwhelming macro fund manager returns (HFR Macro/CTA Index +0.6% YTD), it would not be surprising to see risk management considerations spark a round of profit taking on carry /EM positions over the coming 1-2 weeks, and placid option pricing for the very short-expiries may not be consistent with the potential for reasonable realized volatility over this period.