FX options wrap - Fed USD boost supports volatility risk premium
A more hawkish than expected U.S. Federal Reserve policy decision surprised the market. Subsequent USD gains exceeded the low overnight expiry implied volatility break-evens in EUR/USD and lifted broader market implied volatility late Wednesday. However, USD/JPY spot and implied volatility bulls had to wait for the Bank of Japan rate hold early Thursday.
EUR/USD benchmark 1-month expiry implied volatility jumped from 7.5 to 7.9 and 1-year extended new long term highs to 7.9. Long Vega trades have reaped huge rewards since the U.S. election, with 1-year implied volatility up from 6.5.
Three billion euros of 1.0400 strike expiries helped to contain EUR/USD on Thursday and there are billions more in the vicinity for Friday's expiry. Barriers and triggers below 1.0300 with expiries through Q1 2025, will strengthen support.
Post BOJ USD/JPY gains saw 1-month recover from post US election lows at 9.75 to 10.15, while 1-year gained from 10.1 to 10.35. Risk reversals trimmed a little more downside over upside strike premium as focus shifts to 160.00.
The Dovish Bank of England hold justified the higher overnight break-evens amid the subsequent GBP slide. Three-month and 1-year expiry implied volatility extended recent gains, while 1-month held steady in the low 7's.
AUD/USD 1-month expiry implied volatility tested the top of its post U.S. election 9.0-10.0 range post Fed, while 3-month and 1-year reached new highs since August.
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USD/JPY FX option implied volatility https://tmsnrt.rs/3Dl7IRz
EUR/USD FX option strike expiries Dec 19-23 https://tmsnrt.rs/4gknjzG
EUR/USD FXO 1-3-12-month expiry implied volatility https://tmsnrt.rs/4fpzdqr
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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