FX Options Insights
Implied volatility for FX options has decreased from the peaks seen earlier this week, following President Donald Trump retracting his threats to remove the Federal Reserve Chair and proposing to lower tariffs on China. Despite this, the current pricing and trade patterns indicate ongoing risks of increased FX volatility and potential declines in the USD.
The implied volatility of one-month expirations has largely reversed the significant spikes caused by liquidity issues during the Easter period, signalling a renewed appetite for risk. The USD has rebounded from its lowest levels, and spot markets are currently showing signs of consolidation. However, prices remain significantly higher than those observed before Trump's "Liberation Day," when he announced reciprocal tariffs on trading nations. Longer-term implied volatilities are slower to decline from their recent highs, reflecting the persistent risks associated with ongoing uncertainties and their impact on the U.S. economy and its global standing.
EUR/USD options are showing a strong preference for EUR calls over puts, with barriers and triggers raised to 1.2000 from 1.1500. Additionally, there is notable interest in 9-month expiry 1.2500 strikes, suggesting an increased perceived risk of further EUR/USD appreciation.
While USD/JPY implied volatility has eased this week, a significant premium for JPY calls over USD puts persists, indicating ongoing market concerns about potential losses for USD/JPY.
Barclays is the first to unveil its preliminary model forecasts for month-end FX flow. The model anticipates a robust demand for USD across all leading currencies. This comes in the wake of the 2nd April liberation day, which caused a global risk-off sentiment and a decline in stock markets. Conventional safe havens, such as US Treasuries and the USD, experienced significant declines as well. This situation resulted in an unexpected expansion of U.S. swap spreads and a spike in credit spreads. The trade-weighted USD dropped by 4.6% in April, prompting a rebalancing that drove USD demand.
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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!