Currency hedging costs rise again ahead of US employment report release

　　Foreign exchange market hedging costs have climbed again after a calm summer period, as traders position themselves for potentially sharp price swings triggered by Friday’s key US employment report.

　　On Thursday, the euro-dollar one-day implied volatility rose to its highest level since June and is on track for its strongest closing performance since April.

　　This spike reflects the importance of employment data for traders assessing the Federal Reserve’s next move, especially after Chairman Jerome Powell noted in a speech last month that “downside risks to employment are rising.” Data released Wednesday showed US job openings in July fell to a 10-month low, further intensifying focus on Friday’s report. If the data is weak, it could boost market bets on a more aggressive Fed easing, thereby dragging the dollar lower.

　　Brown Brothers Harriman strategist Elias Haddad said, “The August nonfarm payrolls data will guide the market on whether to start pricing in a 50 basis point Fed rate cut in September, while the current market pricing is only for 25 basis points.”

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　　Wage data is not the only driving factor. As risk factors continue to accumulate—from UK fiscal concerns, political turmoil in France, to geopolitical tensions, a series of central bank meetings, and worries about the Fed’s independence—a composite indicator measuring expected volatility for G10 currencies hit a one-month high this week.

　　On Thursday, one-week euro volatility climbed to a two-month high, as the current volatility cycle covers both the next European Central Bank meeting and the release of US inflation data. An options indicator that closely tracks the difference between implied and realized volatility shows that contract premium levels have reached their highest since January this year.