FX options wrap - Central banks and Russia threat boost prices
After easing from peaks amid a slight decline in demand for USD and USD calls, FX option implied volatility got a renewed boost on Tuesday from the inclusion of major central bank meetings on a key expiry date and risk-aversion sparked by news from Russia.
Having moved to Dec. 19, the benchmark 1-month option expiry now includes policy announcements from the U.S., Britain and Japan. Related USD vs G10 FX implied volatility gains were fairly modest and averaged around 0.4.
However, USD/JPY 1-month implied volatility recovered all of Monday's post Bank of Japan Ueda speech losses - regaining 11.3 from 10.35 and suggesting a greater FX volatility risk involving the BoJ.
News headlines covering rising tensions with Russia ignited risk aversion in early London and gave a fresh boost to JPY, USD and broader implied volatility.
One-month USD/JPY saw the biggest gains from 11.2-11.9 and was the slowest to ease thereafter, while its downside strike premium extended gains over upside strikes.
EUR/USD 1-month rose from 7.65 to 8.05 and 1-month AUD/USD implied volatility from 9.75 to 10.0, which weren't far from the early central bank-induced peaks.
There's a huge amount of soon-to-expire EUR/USD option strikes and related hedging flows to help contain EUR/USD before Friday's key PMI data. Dealers are said to be long of EUR/USD downside strikes, much of it via exotic/barrier options below 1.0500.
For more click on FXBUZ
1-month expiry FXO implied volatility https://tmsnrt.rs/4fWj9NU
USD/JPY 1-month expiry 25D risk reversal https://tmsnrt.rs/48VgHVg
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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