FX options wrap - Trump trades fuel a wild volatility ride
Broader FX option implied volatility has seen a dramatic shift following the U.S. election. After initially dropping sharply as the election risk premium was pared back, volatility surged anew as demand for the "Trump trade" intensified. Traders moved to hedge against further USD strength and the potential for heightened uncertainty in the weeks ahead.
USD/JPY options have been relatively subdued, although verbal intervention on Friday prompted a sharp spot setback from new recovery highs, sparking some demand for JPY calls and implied volatility, especially around the December U.S. and Japanese policy decisions.
EUR/USD implied volatility has seen the wildest ride since the U.S. election, with the benchmark 1-month expiry initially falling from 9.0 to 6.25 and swinging between 7.9 and 7.1 this week. Risk reversals continue to show a consistent USD call premium of 0.5-0.6 over puts in the 1-month expiry, signalling that downside risk remains a concern. Despite this, longer-term range parameters for EUR/USD shouldn't be overlooked, as positions continue to build.
GBP/USD has seen similar price action to EUR/USD as the spot market falls and downside strikes become more popular. The benchmark 1-month risk reversals traded good size at 0.55 GBP puts over calls on Friday.
AUD/USD 1-month expiry implied volatility has been trading in the mid 9.0s after its setback from 12.25 to 9.0 post election, with traders awaiting further cues.
Some larger expiries for the week ahead include plenty of EUR/USD 1.0600 strikes and could help to draw/contain if the USD and market volatility ease.
For more click on FXBUZ
EUR/USD 1-month expiry 25 delta FXO risk reversals https://tmsnrt.rs/48Pwxkm
EUR/USD FX option strike expiries between November 18-22 https://tmsnrt.rs/40Nqqez
1-month expiry FXO implied volatility https://tmsnrt.rs/4ewCtjp
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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