The recent uptick in USD demand is driven by month-end and quarter-end FX rebalancing activities, particularly against the EUR, as per banking models. Yet, while the options market acknowledges a short-term risk of USD appreciation, traders are not aggressively re-establishing long USD call positions. EUR/USD options illustrate this scenario, showing weak demand alongside higher premiums for shorter-dated downside strike options, whereas longer-term expiry options exhibit a tendency to favor further gains towards 1.1500.
The implied volatility of G10 FX options remains relatively low following the decreases seen from early to mid-March peaks. This pattern is common in situations where FX spot markets are stabilizing and risk appetite is not notably diminished. This trend has been observed in USD/JPY, as the spot market has rebounded from lows on March 11, reaching around 146.55 since October, thus putting pressure on the benchmark 1-month implied volatility, which has dropped back to the lower nines, and the downside versus upside strikes on 1-month 25 delta risk reversals has shifted from 1.85 to 1.3. Demand from these lower levels is limited, and there hasn't been notable demand or supply for strikes in either direction.
Nevertheless, uncertainties surrounding tariffs continue, and several economic data releases are on the horizon, which may help mitigate significant setbacks in G10 FX implied volatility. A number of large strikes are set to expire this week, and associated hedging flows might have a greater impact in relatively subdued FX markets.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
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!