FX Options Insights 25/07/24
On Thursday, the major movers in the FX and options markets were the Japanese Yen (JPY) and the Chinese Yuan (CNH), driven by risk aversion and the unwinding of significant short positions.
The USD/JPY continued its decline, testing below 152.00 and causing 1-month implied volatility to reach new highs of 10.75, remaining strong even as it rebounded to 154.00 after US GDP data. Long-term highs were observed in 1-month risk reversals at 1.9 JPY calls over puts, with good demand noted for sub 1-month 150.00 strikes.
Meanwhile, the USD/CNH experienced a sharp decline in late Asia/early London trading, despite additional rate cuts, leading to a surge in implied volatility. One-month expiry risk reversals reached record highs for CNH calls over puts at 0.8, and 1-month implied volatility increased to 3.7 from 3.0. The AUD/USD also saw an increase in implied volatility and downside strikes as the FX market approached key support levels.
The EUR/USD remained relatively stable, resulting in implied volatility staying close to long-term lows and a neutral bias on near-dated expiry risk reversals. Although the GBP/USD faced slightly more pressure, the options market saw minimal changes, with 1-month implied volatility remaining in the low 6's and 1-month risk reversals at long-term lows for downside strikes.
Looking ahead, one-week options now include central bank policy announcements from Japan, the US, and the UK, which has increased related FX volatility risk premiums and should help limit any potential setbacks.
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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!