FX Options Insights 21/01/25
Implied volatility, a crucial indicator of risk in the foreign exchange market and a significant element in options pricing, has seen a sharp decline as traders have lessened their exposure to the risk of Donald Trump implementing trade tariffs on his first day in office.
The EUR/USD pair has been notably affected, with its 1-12 month expiry curve reaching new lows for 2025. The benchmark 1-month expiry dropped to 7.8 (down from a peak of 9.4), while the 1-year expiry fell to 7.4 (down from 8.0). Risk reversals are indicating slower decreases in the EUR put/USD call implied volatility premium, with the 1-month remaining at 0.7 compared to 0.85. GBP/USD is following a similar pattern, with 1-month implied volatility decreasing by over 1.0 to 9.2. AUD/USD fell from 11.0 to 10.3, while USD/JPY dropped from 10.85 to 9.85 as of early Monday. For USD/JPY, the 1-week implied volatility fell below 11.0, suggesting a potential value when compared to the current 1-week historic/realized volatility, which stands at 11.8, ahead of Friday's Bank of Japan policy meeting.
Trump’s announcement regarding potential tariffs on Canada and Mexico by February 1 reversed the post-inauguration decline of the USD, weakening related currencies and renewing interest in associated options. The USD/CAD 1-month expiry implied volatility, which had decreased to 7.7 after a spike to 8.9 between Friday and Monday, has slightly recovered to 8.0. For USD/CNH, implied volatility has also faced pressure. The 1-month expiry benchmark is down by 1.0, remaining at 5.5 from Monday to Tuesday, even as the spot market bounced back from recent lows.
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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!