FX Options Insights 4/2/25
The implied volatility of foreign exchange options has closely tracked the significant shifts in actual FX volatility, driven by recent news related to U.S. tariffs. However, since the tariffs on Mexico and Canada were deferred for 30 days, volatility risk measures have started to stabilise, creating hope that other economies might also benefit from extended negotiation periods.
The USD/CAD exchange rate has become a key indicator of the changing tariff scenario, with its 1-12 month implied volatility term structure reaching new two-year highs following the recent tariff announcement. Nonetheless, after the postponement, the implied volatility has seen a substantial decline.
Similarly, the drop of the EUR/USD to new two-year lows at 1.0125 has rekindled interest in implied volatility, pushing it back toward recent and two-year highs. However, as EUR/USD recovers and stabilises above the 1.0300 mark, implied volatility is drifting back down to the lows observed last week. Risk reversals reflected a notable increase in EUR put premiums over call premiums, reaching levels not witnessed since July 2024, though these have quickly decreased as downside hedges are unwound.
For the USD/JPY pair, implied volatility has fallen back to recent and two-year lows as appetite for risk rebounds within the usual ranges of low FX realised volatility. Nevertheless, risk reversals continue to indicate a strong preference for JPY calls over puts, highlighting the view that this area of the market remains the most exposed.
Spot and implied volatility for USD/CNH are attracting more attention during price pullbacks, as traders are keeping the possibility of further upward momentum in mind.
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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!