FX Options Insights: NFP Volatility

Implied volatility serves as an indicator of actual volatility, which is an essential factor in determining the premium of an FX option. The overnight expiry occurs at 10 a.m. New York time on the next business day, and the current overnight expiry implied volatility levels reflect traders' expectations for the actual volatility generated by Friday's monthly U.S. jobs report.

The implied volatility for USD/JPY's overnight expiry has experienced the most significant rise associated with Friday's jobs data, correlating with USD/JPY's strong relationship to overall risk sentiment, increasing from 15.5 to 21.5. This translates to a premium/break-even of 128 JPY pips compared to 92 JPY pips in either direction. In contrast, the overnight expiry implied volatility for EUR/USD did not show any extra risk premium ahead of Thursday's ECB policy decision, but it has increased from 12.5 to 15.5 since Friday's non-farm payrolls, leading to a change in premium/break-even from 59 to 75 USD pips in both directions.

Moreover, the GBP/USD overnight expiry implied volatility rose from 10.5 to 13.0, translating to a movement from 59 to 73 USD pips in either way, while the AUD/USD overnight expiry implied volatility increased from 13.0 to 15.5, moving from 35 to 42 USD pips in both directions. For context, the current overnight expiry implied volatility levels are similar to those before the May 2 jobs report, but they are still lower than the high levels seen around the April 4 non-farm payrolls, which caused a spike in volatility after the April 2 "Liberation Day" tariff announcement, leading to a period of significant market instability.