FX Options Insights 31/07/24
JPY-related options surged following Wednesday's BoJ tightening, with gamma demand driving 1-week USD/JPY implied volatility to 16.25 and 1-month to 11.5, the highest levels since April 29. Anticipation of breaking the 150.00 barrier, which had been hedged since last week, limited subsequent setbacks. USD/JPY volatility and downside risk premiums remain elevated, with 1-month risk reversals at long-term highs for JPY calls over puts at 1.9.
EUR/USD 1-month implied volatility is struggling to maintain a 5.0 handle as the spot clings to the low/mid 1.08s. Unless there are surprises from Wednesday's Fed meeting or Friday's U.S. NFP data, 1-month volatility is expected to revert to the 3-year low of 4.75 reached on Friday.
The expiration of large FX option positions can impact currency price movements. This week, there are significant option strikes expiring in GBP/USD and EUR/GBP. GBP is relatively stable as the market awaits the Bank of England's policy announcement next week. On Wednesday and Thursday, EUR/GBP has €1.8 billion in 0.8420 strikes expiring. On Friday, €1 billion in 0.8460 strikes are set to expire. In GBP/USD, the key strike is £618 million at 1.2850 expiring on Thursday, with an additional £360 million at 1.2800 also expiring that day.
AUD options had been hedging against a weaker-than-expected Australian CPI, which was realised on Wednesday. Consequently, the AUD slipped and 1-month AUD/USD implied volatility rose to 9.0.
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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!