FX Options Insights 28/01/25
Last week, FX option implied volatility experienced a significant drop following Donald Trump's decision not to enforce immediate trade tariffs as promised during his presidential campaign. However, shorter-term expiry (gamma) options have rebounded from their lows due to risk aversion stemming from tech stocks on Monday and the latest tariff updates.
Canada is expected to cut rates, while the Fed is likely to maintain its current rates later in the week. Trump's proposed tariffs on Canada starting February 1 are contributing to heightened USD/CAD implied volatility, with 1-week trades hitting a two-year peak at 11.0. The Australian CPI report set for release on Wednesday could reinforce the case for a rate cut on February 18 if it reveals poor results. The recent surge in AUD/USD implied volatility is directly tied to the latest tariff developments. Furthermore, the looming threat of tariffs on imported metals is pressuring the AUD, and the possibility of further tech stock declines backs the argument for short AUD/JPY trades.
While USD/JPY implied volatility has subsided from Monday's highs with a stronger USD offsetting much of the previous day's weakness. The persistent risk of heightened market aversion, coupled with uncertainties surrounding tariffs, renders JPY-related option gamma attractive during declines.
EUR/USD is under renewed strain due to USD strength driven by tariff concerns, bolstering demand for shorter-term expiry options and downward strike premiums on risk reversals. Recent trading patterns are veering towards downside digital and binary options within a three-month expiry period.
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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!