FX Options Insights
G10 FX Option implied volatility continues to decline across all expiration dates, largely due to a lack of realised volatility or clear directional catalysts. While certain currency pairs and expiration dates may offer relative value compared to historical realised volatility levels, there has been little momentum to initiate new long positions.
The benchmark 1-month EUR/USD implied volatility has fallen from its mid-March peak of 9.25 to 7.4. Additionally, the 1-month 25 delta risk reversals have shifted to a neutral stance, dropping from multi-year highs favouring upside strikes on March 10-11 to 0.25 for downside strikes last week. Key option strikes at 1.0750 and 1.0800 are set to expire on Thursday and Friday, with related hedging flows potentially influencing price action if FX remains near these levels.
For USD/JPY, the 1-month implied volatility has nearly reversed its February 1 to March 11 rise, declining from 12.4 back to 9.25. Meanwhile, 1-month risk reversals show a return of the JPY call over put implied volatility premium, narrowing to 1.2 from 1.85.
On Tuesday, GBP-related implied volatility opened higher, driven by upcoming UK inflation data and the much-anticipated Spring Statement from the UK Chancellor. Although the increase was modest, it stands out in an otherwise low-volatility environment and serves as a reminder against complacency.
The 1-month AUD/USD implied volatility has dipped to recent lows of 9.25, potentially offering value when compared to historical realised volatility metrics.
Banks are currently issuing FX hedging rebalancing signals for the month and quarter-end. Models indicate a strong demand for the USD in both instances. Barclays' model predicts significant USD demand at month-end compared to all major currencies. The quarter-end model, which follows the same methodology, shows a moderate signal against all major currencies. Nevertheless, this quarter-end model also forecasts robust USD demand against the EUR. It’s worth noting that short-term expiry FX options are set for potential EUR/USD declines.
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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!