FX options wrap - USD bull fatigue and profit taking
The resurgence in FX option implied volatility, fuelled by heightened USD demand following the U.S. election, peaked late on Tuesday before subsiding as supply returned on Wednesday.
EUR/USD was leading the charge with its benchmark 1-month implied volatility rebounding from 9.0-6.25 post-election drop, to peak at 7.9 on Tuesday. However, the removal of 1.0600 barriers for new 2024 lows at 1.0595 induced profit taking, while an in-line U.S. CPI data removed some near-term risk premium and 1-month traded back at 7.0 in late Europe Wednesday. One-month expiry risk reversals held a 0.5 implied volatility premium for USD calls over puts as EUR/USD fell, but dropped to 0.4 as EUR/USD spot losses stalled.
There is still demand for USD calls, especially versus EUR, though EUR put spreads and downside binary options are indicative of a slower, less volatile EUR/USD grind lower.
USD/CNH implied volatility, often a bellwether for the broader FX market, saw a notable shift following a lower fix, with the 1-month expiry dropping from 6.6 on Tuesday to 5.7 in Asia on Wednesday. Other currency pairs and expiry dates also experienced a reduction in implied volatility. However, with continued USD strength and the uncertainty surrounding the policies of the incoming U.S. president, the risk of further USD gains should limit significant setbacks in the broader market.
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1-month expiry FXO implied volatility https://tmsnrt.rs/3YPGTMm
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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