FX options wrap - Billions, euro warning, BoJ risk, yuan view
FX option implied volatility retreated from the peaks seen amid Tuesday's bout of risk aversion, but the pullback was limited.
EUR/USD is still mired inbillions of euros of soon-to-expire option strikes between 1.05-1.06, which is helping to limit and contain FX. However, price action indicates anongoing perceived threat of more EUR/USD losses, with renewed demand for EUR puts/USD calls via risk reversals. One-month 25 delta has tradednew highs since July at 0.7 and 2-month was paid a billion euros a leg from 0.875 to 0.925. Implied volatility has edged higher again, too, with 1-month paid 7.85-7.95 and 3-month 7.25-7.35.
USD/JPY staged a decent recovery toward 156.00 from a 153.28 low on Tuesday as risk aversion fades. Implied volatility is retreatingamid the strong reverse spot/vol correlation being displayed by risk reversals. However, there's still demand for downside strikes to help limit JPY call setbacks on those risk reversals, especially for dates falling after Decembers U.S. and Japanese policy decisions. While bets on USD/JPY losses outweigh those for gains right now, some of the price action suggest there's potential for scope toward 160.00 prior.
USD/CNH option implied volatility has dropped sharply, with 1-3-month expiries now fully retracing the pre U.S. election gains, while leaving longer dated expiries elevated. Price action seems consistent with spot consolidation and less actual/realised volatility into early 2025.
For more click on FXBUZ
1-3-12-month expiry EUR/USD risk reversals https://tmsnrt.rs/40XZgS6
1-month expiry FXO implied volatility https://tmsnrt.rs/48Xw1AS
EUR/USD FX option strike expiries Nov 20-29 https://tmsnrt.rs/4hUvSlP
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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