FX Options Insights 23/01/24
FX option implied volatility has been lower following the absence of heavy day one tariffs as initially threatened by U.S. President Donald Trump. This decline has led to a decrease in the associated FX volatility risk premiums, impacting market dynamics. Traders who employed short volatility strategies earlier in the week likely reaped substantial profits, prompting some to secure gains to counterbalance the diminishing implied volatility levels.
EUR/USD saw a significant decline in implied volatility, with the 1-month rate dropping by 2.0 vols and stabilizing around 7.4, while the 1-year rate decreased from 8.0 to 7.2. Shorter maturities could face further downside potential if Friday's PMI data fails to spur volatility, indicating a cautious approach based on overnight option pricing signals.
In the GBP/USD realm, the 1-month expiry implied volatility experienced increased demand below 8.5 after recent highs near 11.0. The decreased probability of the spot price breaching the significant 1.2000 option barriers contributed to this shift, reducing downside strike premiums in risk reversals.
Anticipation mounts for the Bank of Japan's expected rate hike of 25bps to 0.5% on Friday. Overnight expiry USD/JPY implied volatility surged by nearly 7.0 to 19.25, highlighting a break-even range of 75 JPY pips to 125 JPY pips, the narrowest for any BoJ meeting since June.
USD/CAD's 1-month expiry implied volatility remains robust at 8.0, bouncing back from a low of 7.25 amid concerns surrounding the looming Feb. 1 trade tariffs. Conversely, USD/CNH implied volatility has dwindled to new 6-month lows, influenced by spot price adjustments and consolidation following diminished trade tariff apprehensions. This evolving volatility landscape underscores the intricate interplay of geopolitical events and economic indicators shaping FX markets, guiding strategic decisions amongst traders and investors.
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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!