FX options wrap - FX risks fade amid central bank cuts
G10 FX option implied volatility has fallen quite sharply since the U.S. NFP and CPI data removed much of the uncertainty about the U.S. rate path, which in turn, has aided a broader risk recovery. Benchmark 1-month expiry implied volatility consequently trades new post data lows.
However, one-week expiry options now include the U.S. Federal Reserve's policy decision, and related implied volatility gains show that dealers aren't complacent about related short-term realised FX volatility. One-week expiry also includes the Bank of England policy decision, which has boosted GBP related implied volatility. There should also be a significant increase in 1-week expiry JPY related implied volatility when it includes the September 19 Bank of Japan policy announcement from Friday.
Overnight expiry options are the best FX volatility bellwether for key event risks, so it was no surprise, after only a minimal increase in overnight EUR/USD implied volatility, to witness a lacklustre FX reaction to Thursday's widely expected 25bps ECB rate cut.
Billions of euros of nearby strike expiries and related hedging flows helped to contain EUR/USD post ECB, as they had done all week and possibly in to next week's Fed decision.
Recent price action anticipates FX range trading to continue in EUR/USD and GBP/USD for now, with a small USD call premium on risk reversals warning of downside risks in both. nL1N3KT0DO nL1N3KS0FB
USD/JPY options were primed for an eventual test on 140.00 option barriers, a risk which is likely to simmer through next week's central bank decisions. However, downside strike implied volatility premiums have come softer with broader implied volatility and a mild USD/JPY spot recovery. One-month 25 delta USD/JPY risk reversals slip to 1.85 from 2.2 on Wednesday.
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1-month expiry FXO implied volatility https://tmsnrt.rs/3Badww8
1wk expiry FXO implied vol https://tmsnrt.rs/4efm5op
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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