FX Options Insight
FX spot markets have remained relatively stable within their recent ranges. However, growing risk aversion is driving up overall implied volatility and increasing premiums on USD put options, as President Donald Trump's proposed tariffs are widely perceived as detrimental to the U.S. economy. Additionally, month-end FX hedging activities are exerting influence on the market, potentially limiting USD losses for now.
Shorter-term implied volatility has risen sharply to reflect heightened risk aversion and to hedge against potential realized volatility risks. This stems from Trump’s announcement of reciprocal tariffs on April 2, coupled with the upcoming U.S. jobs report for March, due on April 4.
Among major currency pairs, USD/JPY has seen the most notable recovery in implied volatility, given the yen's traditional role as a risk sentiment barometer. The benchmark 1-month expiry implied volatility has climbed from 9.0 to 10.5 over the past week, with a mid-March peak of 12.4 marking the highest level in 2025 to date. One-month expiry risk reversals have also increased, with a 1.6 premium for JPY calls over puts, up from 1.2 last week and nearing the early-March high of 1.85.
For EUR/USD, the 1-month expiry implied volatility has risen to 8.0 from 7.0 last week. More notably, there has been a significant increase in the premium for EUR calls over puts, as reflected in risk reversals that have reached new highs for EUR/USD topside since 2020. With USD put premiums on the rise, USD bears may consider exploring USD put options with knockout (KO) features, which offer substantial cost savings compared to standard vanilla USD put options. Meanwhile, the low overnight expiry implied volatility for AUD/USD reflects the limited risk associated with the Reserve Bank of Australia potentially cutting rates on Tuesday.
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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!