FX Options Insights 02/12/24
Since last Wednesday, month-end FX rebalancing flows have put pressure on the broader USD, with reduced liquidity due to the U.S. holiday amplifying some of these movements. Demand for USD calls remains strong, particularly against currencies potentially impacted by Trump-era tariffs. These options, which allow holders to purchase USD at a predetermined price on a future date, have seen increasing premiums, particularly against the EUR. However, recent drops in their premiums compared to USD puts, seen in risk reversal contracts, suggest that the EUR/USD may lose value more slowly if it goes down even more. One-week expiry FX options now include the Dec. 6 U.S. Non-Farm Payrolls (NFP) report, which has driven one-week implied volatility higher. The market's sensitivity to last month's NFP data has led to an increase in implied volatility, a measure of expected actual volatility. The report is expected to impact the Federal Reserve's policy decision on Dec. 18, making it a crucial factor for near-term positioning. On Friday, the standout movement was in USD/JPY, which saw a significant drop below 150.00, pushing benchmark one-month expiry implied volatility to post-U.S. election highs of 12.75. Market focus was already on the upcoming Dec. 19 BoJ meeting, and Friday's movements, driven by stronger-than-anticipated Tokyo inflation data, have only increased its importance.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!