FX options wrap - Low FX vol justified but JPY caught off guard
Low overnight expiry FX option implied volatility flagged expectations of a minimal reaction to the U.S. CPI data, which proved to be justified. That is except for USD/JPY, where the price action would suggest officials may have taken advantage of the weaker U.S. data to give the JPY an intervention-led boost.
Broader FX option implied volatility has been edging ever lower over recent sessions, encouraging carry trades. Benchmark 1-month expiry EUR/USD traded 3-year lows at 4.9 before attracting some light demand, while 1-month GBP/USD is nearing post-Brexit lows at 5.5. Recent trade flows had shown an interest to position for gains toward 1.0900 in EUR/USD and 1.3000 in Cable, which are also proving justified.
USD/JPY 1-month expiry implied volatility had reverted to 8.4 from a 10.4 peak last week. That was still expensive versus longer-term lows and fair value historic measures and highlighted the simmering fear of intervention. That caution proved justified when it seemed that intervention may be the only explanation for such a large USD/JPY fall (162.50-157.40). USD/JPY 1-month expiry implied volatility was subsequently paid to 9.75.
However, JPY pairs stand isolated and the rest of G10 FX implied volatility is likely to remain heavy as the data passes without much fanfare and risk appetite stays strong toward the typical summer lull.
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1-month expiry FXO implied volatility https://tmsnrt.rs/45XzjTl
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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