FX Options Insights 26/09/24

On Thursday, there was no substantial change in the implied volatility of options, which continues to be slightly higher than the levels observed at the beginning of the week.

Limited implied volatility gains would indicate that the market is not anticipating any explosive FX moves, despite the fact that overnight expiry options now include Friday's U.S. PCE data. Nevertheless, the implied volatility of the USD/JPY pair soared from 17.0 on Wednesday to 26.0 on Thursday overnight, as the outcome of Japan's LDP leadership election will now be included in the expiration on Friday. The risk to BoJ policy and a stronger JPY in the event that one of the current frontrunners, Sanae Takaichi, wins the election has been underscored by trade flows, which have demonstrated a greater concern regarding JPY weakness. Recently, the demand and premium for EUR/USD topside options have been restricted, despite the fact that the benchmark price was above 1.1200. Sub 1-month expiry risk reversals were also unable to maintain a topside strike premium and are currently trading in favour of downside strikes. Is this a cautionary signal or an opportunity?

The U.S. dollar's month-end FX rebalancing signals are neutral to mildly negative