FX Options Insights 06/09/24
The significance of the Non-Farm payrolls number to the Federal Reserve's rate path was underscored by the fact that the U.S. jobs FX volatility risk premium reached 2024 highs prior to the data release on Friday. The demand for USD puts and higher premiums were deemed to be justified by the subsequent increase in USD weakness following a nonfarm payrolls report that was lower than anticipated.
Nevertheless, the implied volatility of broader FX options is lower as a result of the USD's retreat from its lowest levels and the reduction of event risk premiums. The USD/JPY one-month implied volatility traded at 13.75 on Thursday, up from 11.9 on Monday, and concluded the week at 12.6. The implied volatility of the AUD/USD one-month has nearly completed a full circle, rising from 9.15 to 10.0. Conversely, the EUR/USD one-month has returned to 5.8 from its high of 6.35 on Thursday.
The demand for shorter-dated expiry topside strikes exceeded 1.1200, resulting in a reversal of EUR/USD sub-one-month expiry risk reversals in favor of USD puts/EUR calls prior to the jobs data. If that premium/demand fails to materialize next week, it could indicate a lack of anticipation for additional short-term FX gains, particularly if the anticipated 25 basis points rate cut by the European Central Bank on Thursday is accompanied by a dovish tone.
FX options had been covering the risk of USD/JPY breaking 140.00 barriers sooner than initially anticipated, and one-month USD/JPY risk reversals increased premiums for downside over upside strikes from 1.6 to 2.4. It is worth monitoring both trades and prices for any indications of this demand weakening next week.
The final significant data before the U.S. Federal Reserve policy decision on Sept. 18 is Wednesday's U.S. CPI data. Currently, the probability of a 50 bps cut is 37%.
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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!