FX Options Insights 12/09/24
Since the U.S. NFP and CPI data removed a significant amount of uncertainty regarding the U.S. rate path, the implied volatility of G10 FX options has decreased significantly. This, in turn, has contributed to a broader risk recovery. As a result, the implied volatility of benchmark 1-month expiry trades at new lows following the release of data.
Nevertheless, the U.S. Federal Reserve's policy decision is now included in one-week expiry options, and the resulting implied volatility gains indicate that dealers are not complacent about the short-term realised FX volatility. The Bank of England policy decision, which has increased the implied volatility of GBP related to the one-week expiry, is also included. When the September 19 Bank of Japan policy announcement from Friday is incorporated, there should be a substantial increase in implied volatility related to the JPY for 1-week expiry. After only a minor increase in overnight EUR/USD implied volatility, it was unsurprising to observe a lackluster FX reaction to the widely anticipated 25bps ECB rate cut on Thursday. Overnight expiry options are the most reliable FX volatility bellwether for key event risks. After the ECB's announcement, the EUR/USD was contained by billions of euros in nearby strike expiries and related hedging movements, as they had been doing throughout the week and may continue into the Fed's decision next week.
A small USD call premium on risk reversals warns of downside risks in both EUR/USD and GBP/USD, as recent price action anticipates that FX range trading will continue for the time being. The USD/JPY options were prepared for an eventual challenge of the 140.00 option barriers, a risk that is expected to persist throughout the central bank decisions of next week. Nevertheless, the implied volatility premiums for the downside strike have become more lenient as a result of a mild USD/JPY spot recovery and broader implied volatility. The one-month 25 delta USD/JPY risk reversals have decreased from 2.2 on Wednesday to 1.85.
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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!