FX options wrap - Many reactions to shifting FX drivers
Shifting interest rates/expectations are a key driver of FX and volatility and there's certainly been some related movements this week.
Weaker than forecast Australian CPI removed any RBA hike probability and put more pressure on AUD. That lifted related implied volatility, with 1-month AUD/USD posting a new recent high at 9.1 before supply returned it to 8.7 as AUD/USD recovered from its lows.
The BoJ's 15 bps hike to 0.25% beside bond purchase reductions prompted a delayed reaction that eventually accelerated JPY gains and took USD/JPY below 150.00 on Wednesday. Shorter dated expiry implied volatility spiked higher and USD/JPY 1-month expiry extended highs since April 29 intervention to 11.6. Setbacks have proved minimal. One-month expiry USD/JPY risk reversals matched long term highs for downside strikes, while trade flows showed demand for strikes toward 145.00 with sub 3-month expiries.
The U.S. Federal Reserve left rates on hold as expected and the FX reaction was limited as markets maintain pricing for 75bps of cuts by December and the first cut in September.
The uncertainty surrounding Thursday's Bank of England rate decision took GBP related overnight expiry implied volatility to long term highs. However, pre announcement GBP losses likely dampened the subsequent FX reaction when the BoE cut rates by 25bps. 1-month implied volatility trades back below 6.0.
EUR/USD has been relatively side lined, but options hold a cautious bid for EUR puts pre NFP, which is keeping implied volatility above long term lows amid spot setbacks.
Friday's U.S. NFP data would have to be well outside of forecasts to prompt a USD reaction, but that eventuality could do more damage to USD/JPY so it's no surprise to see its overnight expiry implied volatility holding long term highs around 30.0 (187 JPY pips).
For more click on FXBUZ
1-week and 1-month expiry USD/JPY FXO implied volatility https://tmsnrt.rs/4fqjRDs
EUR/USD 2-week and 1-month FXO 25 delta risk reversals https://tmsnrt.rs/4dpCHsv
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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