FX Options Insights 01/08/24
FX and volatility are mostly driven by changing interest rates and expectations, and this week has seen some notable changes in both areas.
A lower-than-expected Australian CPI increased pressure on the AUD and eliminated any chance of an RBA hike. This increased associated implied volatility, and the 1-month AUD/USD pair reached a fresh high of 9.1 before supply pulled it back to 8.7 as the pair rose from its lows.
A delayed response to the BoJ's 15 basis point raise to 0.25% in addition to decreases in bond purchases ultimately boosted JPY advances and sent the USD/JPY below 150.00 on Wednesday. Shorter-dated expiry implied volatility increased sharply, and the USD/JPY 1-month expiry reached its highest point since the intervention on April 29 at 11.6. There have not been many setbacks. For downside strikes, one-month expiry USD/JPY risk reversals matched long-term highs. Trade flows, however, indicated a desire for strikes with expirations shorter than three months, around 145.00.
As anticipated, the US Federal Reserve decided to keep interest rates, and the currency's response was muted because markets were still pricing in a 75 basis point reduction by December and a first decrease in September.
Due to the uncertainty around the Bank of England's rate announcement on Thursday, the implied volatility for GBP linked overnight expiry reached all-time highs. But the post-announcement GBP losses probably subdued the FX response when the BoE reduced rates by 25bps. Implied volatility for one month trades back below 6.0.
Although EUR/USD has been largely stagnant, options traders are maintaining a cautious bid for EUR puts before to the NFP, maintaining implied volatility above long-term lows despite recent setbacks. It would take a significant deviation from forecasts in Friday's U.S. NFP data for the USD to respond, but that outcome would cause greater harm to the USD/JPY pair, therefore it is not surprising that its overnight expiry implied volatility is holding long-term highs around 30.0 (187 JPY pips).
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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!