FX options wrap - EUR/USD at the fore of broader FX warnings
FX options markets had been anticipating a EUR/USD break lower, with strong demand for implied volatility and downside strikes, particularly in the 1.0200-1.0000 range and through risk reversals. However, the speed and magnitude of the drop, triggered by weak eurozone PMI data, exceeded expectations
Short gamma exposure below the 2-year low and option barriers at 1.0450 accelerated the EUR/USD plunge to 1.0332, and there could be more below. Benchmark 1-month expiry implied volatility retested its pre-U.S. election and long-term high at 9.0, while risk reversals hit multi-month highs for downside strikes, with the 1-month 25-delta doubling to 1.25 this week. These implied volatility and EUR put gains extended across the curve, reflecting broad-based demand.
The ripple effects were felt across other major currency pairs. GBP/USD broke below 1.2500 option barriers which drove 1-month implied volatility to an eventual high of 8.25. USD/CHF 1-month expiry implied volatility traded between 7.5 and 7.75, while 1-month EUR/CHF reached 6.85.
One month expiry USD/JPY implied volatility is firmly underpinned since its expiry included December's U.S. and Japanese policy announcements from Tuesday and reaching 11.9 from 10.35 since.
Similar trends are emerging in other currency pairs. While not yet as pronounced as in EUR/USD, rising demand for options and implied volatility, particularly for expiries extending through 2025, signals that FX realised volatility could intensify in the months ahead.
For more click on FXBUZ
1-month expiry FXO implied volatility https://tmsnrt.rs/3Z05D4S
3-month expiry FXO implied volatility https://tmsnrt.rs/3ATZ0ZK
EUR/USD 1-3-12-month expiry risk reversals https://tmsnrt.rs/3YZ0ZUQ
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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