FX Options Insights
At the start of the week, the sharp drop in FX volatility and USD put risk premiums appeared overstated, as a recovery began even before Wednesday's uptick. Positive news from U.S.-China trade discussions over the weekend caused a regression in implied volatility across major currency pairs, nearly reversing the gains seen after the April 2 tariff announcement. Implied volatility stabilised late Monday into early Tuesday but then experienced strong renewed demand.
On Wednesday, news of a May 5 meeting between the U.S. and South Korea regarding Forex triggered a market reaction, leading to USD selling and increased purchasing of implied volatility. The decline in USD/JPY and the rise in implied volatility pushed the benchmark 1-month expiry from 10.0 to 10.7, after stabilising in the mid-9s. Risk reversals saw an increase in premium for downside over topside strikes, shifting from 1.5 to 2.1 for JPY calls over JPY puts for a 1-month expiry.
EUR/USD's 1-month implied volatility rose to 8.25 from 7.6 on Wednesday, having previously stabilised around 7.0. Risk reversals for EUR/USD still show a strong premium for topside over downside, indicating market perception of the upside as the most vulnerable area for both spot and implied volatility increases. For AUD/USD, the 1-month implied volatility increased to 10.25 from a recent low of 9.4. Risk reversals for AUD/USD have seen their downside strike risk premiums fall from five-year highs earlier in April to one-year lows. Although implied volatility has slightly decreased from its peaks early Wednesday—except for USD/JPY—the rapid rise and high levels suggest ongoing anxiety in currency markets.
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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!