FX Options Insights
Speculation continues to swirl around the scope of Wednesday's broad-based U.S. trade tariffs and their potential impact on the global economy. While studies suggest a range of possible outcomes, opinions remain divided on how these developments might influence the USD.
A recent study by Aston University, highlighted by the Financial Times on Tuesday, estimates that a 25% tariff on all U.S. imports could cost the global economy $1.4 trillion and significantly drive up prices in the U.S. Economists widely agree that the United States is likely to bear the brunt of the economic slowdown and inflationary pressures from such tariffs. However, the implications for the USD remain uncertain, as heightened recession risks in the U.S. could undermine its status as a global safe haven.
Forward-looking FX options may provide some insight into how major currency pairings could react. Implied volatility has risen following sharp declines since early March and previous long-term peaks, a common occurrence during periods of heightened FX volatility and risk aversion. This trend is particularly evident in shorter-dated expiries, which reflect the market's anticipation of short-term volatility stemming from the tariff announcements.
The post-election "Trump trade" initially bolstered the USD, but the currency has been under pressure since early February. Recently, there has been a noticeable shift away from USD call options toward USD put options, which grant holders the right to sell the USD at a future date. This trend is most pronounced against currencies like the EUR, GBP, and JPY.
For those anticipating USD weakness, USD put options with knock-out triggers offer a cost-effective alternative to standard vanilla options. Conversely, traders expecting the USD to strengthen can capitalise on the currently low premiums for USD call options.
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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!