FX Options Insights 17/02/25

FX options are signalling a potential for further losses in USD/JPY. Recently, there has been a trend of buying downside strikes for USD/JPY options, particularly those at or below 150.00, with expirations scheduled for the coming weeks and months. These options aim to hedge against a deeper decline in USD/JPY and an increase in volatility. Volatility plays a crucial role in determining option premiums, with implied volatility serving as a substitute measure. Currently, the implied volatility for USD/JPY has been falling behind its G10 FX counterparts, and it shows a significant premium for JPY calls compared to puts.

Markets are pricing in a 22-basis-point move, reflecting an 88% probability of a 25bps rate cut by the RBA on February 18. Additionally, 90% of surveyed economists anticipate a rate cut. Overnight expiry options now account for the RBA decision, but the volatility risk premium remains subdued. Implied overnight AUD/USD volatility is at 12.5, with a premium or break-even point of 33 USD pips. This suggests a relatively calm trading environment typical of the FX market. Meanwhile, other expiry dates have hit fresh lows not seen since the summer of 2024. However, a "hawkish cut" could trigger heightened volatility, while an unexpected decision to hold rates steady would likely strengthen the AUD.