FX Options Insights 13/06/25
The one-month expiry FX option implied volatility started this week at its lowest point in a month, nearing the levels seen before the April 2 tariffs. Nevertheless, those looking for value found opportunities as volatility rose and implied volatility increased. The movements were influenced by post U.S. CPI USD weakness, further exacerbated by renewed trade threats from U.S. President Donald Trump midweek, before the USD regained strength after Israel's strike on Iran on Friday, sparking risk aversion.
EUR/USD is currently stabilising around 1.1500 after reaching a new 3.5-year high of 1.1632 on Thursday, with the benchmark one-month expiry implied volatility climbing to 8.4 from lows of 7.3 earlier this week. However, the market's current long positioning on FX spot and topside options is increasing the likelihood of a USD short squeeze, potentially explaining the decline in topside versus downside strike premiums, as evidenced by the one-month 25 delta risk reversals reaching their lowest level since late March.
Those concerned about a potential USD rebound may want to explore simple vanilla USD call options, which involve only the risk of an upfront premium. Implied volatility has also risen in other currency pairings, particularly with JPY and CHF and their corresponding call options drew more interest on Friday, along with AUD/USD options and their downside strike premium, highlighted by a 0.3 to 1.0 increase in one-month risk reversals. On Monday, a significant $7.4 billion USD/JPY 145.00 strike expiry is expected, which may influence or contain the spot market. Looking ahead to next week, central bank policy announcements from Japan, the U.S., the UK, and Switzerland are anticipated to help limit any declines in shorter-dated expiry implied volatility.
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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!