FX Options Insights 22/07/24
The FX options market showed little response to the news of U.S. President Joe Biden not running for another term. Volatility premiums around the U.S. election have slightly decreased, but overall FX realized volatility remains low, impacting option premium during the summer months.
Central bank policies, particularly the U.S. Federal Reserve, continue to be the main drivers for FX and volatility. Any deviation from the expected paths could influence the market. The upcoming U.S. PCE data is crucial for the U.S. dollar this week and could increase the likelihood of a rate cut on July 31 if it falls short of expectations (25bps not fully priced until September 18).
EUR/USD option implied volatility remains the lowest among major USD pairs, with limited near-term directional bias. Similarly, 1-week options including EZ pmi and the U.S. PCE also lack clear direction. The expiration of numerous nearby option strikes may impact FX hedging strategies.
On the other hand, AUD/USD options reflect concerns about potential FX declines due to China's economic worries and decreasing commodity prices. The implied volatility for the 1-month expiry increased from 8.0 to 8.6 on Monday, with a higher downside over upside strike premium through risk reversals.
USD/JPY option implied volatility has decreased due to low realized volatility. However, there has been a shift in demand and premium towards JPY calls, indicating a perceived downside vulnerability for USD/JPY spot.
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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!