FX Options Insights 29/01/25
The implied volatility for FX options has stabilized following last week's adjustments post-inauguration. Notably, in USD/CAD, the impending threat of tariffs scheduled for February 1 has kept volatility and topside risk premiums close to two-year highs. This concern surrounding tariffs has limited any declines in USD/CAD implied volatility, with trade flows indicating a preference for topside strikes, particularly leading up to early February. The Bank of Canada is expected to announce a 25 basis point rate reduction on Wednesday, with forward guidance playing a crucial role given the ongoing tariff uncertainties.
On the other hand, the U.S. Federal Reserve is likely to maintain rates in its meeting later on Wednesday, which is not generating significant additional FX volatility risk premium. However, there has been an increase in EUR/USD overnight implied volatility from 11.0 to 15.5 since Tuesday, reflecting the anticipation of a 25 basis point rate cut from the European Central Bank on Thursday.
In terms of volatility levels, EUR/USD 1-month implied volatility has found support at 7.5, and the 1-year level at 7.15 after a decline from 9.2 to 7.2 and 8.0 to 7.0 respectively the previous week. Trade flows suggest a preference for holding downside strikes through exotic options, while risk reversals continue to exhibit a stronger premium for downside strikes compared to upside strikes, indicating a vulnerable aspect of this market.
Noteworthy is the presence of significant euros in options close to expiring around 1.0400, which could act as a constraint on EUR/USD ranges and volatility into early February. Meanwhile, interest in GBP/USD options has been minimal, with the benchmark 1-month expiry maintaining levels in the lower/mid 8's following a drop from 10.25 last week. In AUD/USD, 1-month implied volatility has decreased from Tuesday's recovery high of 9.9 to 9.7, after falling from 11.0 to 9.0 the previous week. The premiums and flows in both pairs indicate that their downsides are still perceived to be at risk.
USD/JPY implied volatility has substantially reversed the surge witnessed on Monday as stock and spot markets stabilize temporarily.
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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!