FX Options Insights 30/07/24
BoJ Fear Gauge and FX Volatility
The anticipation surrounding Wednesday's Bank of Japan (BoJ) policy announcement has heightened FX volatility risk premiums, with overnight expiry options reaching year-to-date highs.
Implied volatility for JPY-related options with overnight expiry is at its peak since the December 19 BoJ announcement, indicating the significant FX volatility expected from this event. The implied volatility for USD/JPY with sub-1-month expiry also remains elevated, hitting new highs since the BoJ's intervention on April 29. Risk reversal contracts show a pronounced volatility premium for JPY calls over puts, highlighting a perceived vulnerability on the USD/JPY downside. There are large amounts of USD options with strikes at 155.00 USD/JPY and 1.0850 EUR/USD expiring this week. Related cash hedging activities could influence spot FX markets if external events fail to move exchange rates from their current ranges.
Overnight implied volatility for AUD-related options increased on Tuesday, ahead of Wednesday's Australian CPI data release, which could be pivotal for an RBA rate hike decision on August 6.
Shorter-dated expiry options for other currency pairs are also seeing elevated volatility premiums. This reflects the market's efforts to hedge against potential FX volatility arising from Wednesday's U.S. Federal Reserve policy announcement and Friday's U.S. NFP data release.
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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!