Since the U.S. trade penalties were announced and first countermeasures from China were revealed, FX volatility risk premiums have soared. Reflecting the anxiety gripping FX markets, FX options have enjoyed the largest short-term gains collectively since the start of the worldwide epidemic in 2020.
Following its plunge to 5-year lows beneath 0.6000, AUD/USD has seen the largest option premium increases. Starting with benchmark 1-month AUD/USD implied volatility doubled to 17.0 and 1-month 25 delta risk reversals quadrupled to 3.0 AUD puts over calls since April 2.
From 9.0 and 1-month risk reversals more than thrice to 2.8 JPY calls over, USD/JPY 1-month implied volatility soared to 14.5. Not one G10 pair has spared the post-tariff earthquake that also permeates Asian and more broadly developing market currencies.
Regarding the USD, investors now must make a decision. On the one hand, it is sought as a safe refuge among the declining global growth perspective and consequent risk aversion. On the other hand, the US economy and USD are fast losing their unique status and consequent support without any back-pedalling from Trump on tariffs.
EUR/USD and associated options help to underline the present uncertainty. The first tariff news landed on USD and raised EUR/USD to its highest level since October at 1.1147. Risk reversals contracts show a significant return of topside risk; EUR calls demand their largest premium above puts since 2020. But since the spot setback to 1.0880, they have subsequently completely backtracked those gains. Likewise in GBP/USD have been comparable movements.
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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!