FX Options Insights 19/07/24
FX options trading saw limited changes this week, with the exception of USD/JPY which experienced increased implied volatility due to risk aversion. However, apart from JPY, the overall volatility in FX markets remained low, resulting in implied volatility staying near long-term lows for major currency pairs.
For instance, EUR/USD 1-week implied volatility was at 4.5, just 0.2 higher than last week's 3-year low of 4.9. Similarly, GBP/USD 1-month implied volatility reached 6.4 from post-Brexit lows of 5.5 before ending the week at 6.1. Even AUD/USD struggled to maintain implied volatility in the low 8's despite the risk aversion and spot setback.
The premium for USD calls over puts on sub-1-month expiry risk reversals in GBP/USD and EUR/USD was erased, and benchmark 1-month contracts are not far behind.
The recent price action indicates a decrease in the attractiveness of the USD, and it is expected that FX volatility will remain subdued and within ranges for the time being.
Unsurprisingly, USD/JPY implied volatility is higher compared to other G10 FX peers, and shorter-dated risk reversals show a strong JPY call over put premium. This reflects the perceived risk of increased volatility and JPY losses, along with the ongoing threat of USD/JPY intervention.
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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!