FX options wrap - Risk, EUR 1.10, GBP barrier, U.S. Election
FX option implied volatility is mostly heavy, especially with the latest China stimulus package supporting risk.
The U.S. election is now only six weeks away, but dealers point out a lack of option end-user demand for FX volatility protection when compared with the same period before the 2020 election. This increases the value potential from current implied volatility levels if and when this situation changes, with a leading investment bank already highlighting this value via USD/CNH topside strikes.
EUR/USD has been pinned to the lower/mid 1.11's by massive FX option strike expiries this week. Billions more euros expire today, but there are many more to come around current spot levels.
EUR/USD bulls should be aware of the FX setback risk. There has been a pick- up in demand for sub 1-month expiry 1.10 strikes this week and related risk reversals have struggled to retain a newly established topside over downside strike premium. Benchmark 1-month 25 delta risk reversals return to neutral from post Fed highs at 0.2 EUR calls.
GBP/USD bulls extend the slow grind towards 1.3400 (alleged barriers), but those barriers touted for EUR/GBP at 0.8300 could be more significant and increase volatility and spot losses if breached.
USD/JPY implied volatility was little changed with 1-month around 11.6 this week. AUD/USD 1-month implied volatility sticks to 8.7 as spot tests the mid-June highs at 0.6900. Overnight EUR/SEK implied volatility might be underpricing Wednesday's Riksbank reaction.
For more click on FXBUZ
EUR/USD 1-month expiry 25 delta risk reversals https://tmsnrt.rs/4dh0o5J
EUR/GBP FXO implied volatility https://tmsnrt.rs/3ZzS91u
Richard Pace is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond
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