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Implied volatility serves as an indicator of both present and anticipated volatility risk in financial markets. Currently, it is experiencing broad-based pressure and is hovering near its lowest levels since prior to the implementation of "Liberation Day" tariffs on April 2nd. Looking ahead, there is a significant amount of event risk scheduled for late next week. The 1-week implied volatility reflects this heightened uncertainty and carries a considerable risk premium. This volatility pricing will account for critical events such as Wednesday's Federal Reserve meeting, the non-farm payroll (NFP) data release on Friday, and the impending deadline for the extension of U.S. trade tariffs. Additionally, there are central bank policy announcements expected from Canada and Japan on Wednesday and Thursday, respectively.
Overall market dynamics and positioning seem to indicate that a weaker U.S. dollar (USD) remains the most probable scenario, particularly in comparison to the Euro (EUR). The sub-3-month risk reversals for the EUR/USD pair have shown an increase of 0.4 in favor of USD put options, signaling a shift in market sentiment. Despite witnessing low levels of both realized and implied volatility, traders are capitalizing on the prevailing calm to acquire inexpensive topside strike options, including 1.24 strike USD put options with expirations ranging from 6 to 12 months.
In the USD/JPY market, both the currency pair and its implied volatility have experienced a notable decline. This shift was encouraged by favorable conditions following Japan's recent election results and advancements in negotiations regarding a U.S. trade agreement. The benchmark 1-month implied volatility has decreased from 11.1 to 9.5, coinciding with a rebound in the spot market where volatility found some support.
Meanwhile, bulls in the AUD/USD market are showing signs of frustration after encountering another unsuccessful attempt to push prices higher this week. In light of this, cheaper long AUD call / USD put options, such as AUD call RKO, are being viewed as a more appealing strategy to maintain market participation. It is also important to highlight that there are A$5 billion worth of 0.6600 strike expiries scheduled throughout the upcoming week. If the foreign exchange (FX) markets can manage to remain within their recent trading ranges, the customary hedging activities associated with numerous large G10 FX option strike expirations will likely play a more active role in the market next week
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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!