Options show extent of FX risk from U.S. election debate and CPI
Sept 10 (Reuters) -Overnight expiry FX options now include Tuesday's U.S. election debate between Donald Trump and Kamala Harris and Wednesday's U.S. CPI data, with related prices showing the extent of the perceived risk to FX.
FX volatility is an unknown, yet a key parameter of an FX option premium, so dealers use implied volatility as a substitute. If realised/actual FX volatility matches implied volatility over the life of the option it will cover the premium, while disparity between implied and realised volatility creates a trading opportunity.
Overnight expiry is the next working day at 10 a.m. New York, 3 p.m. London, so any increase in its implied volatility when factoring inmajor events will show the increase in actual/realised FX volatility that those events are expected to generate.
Since including the election debate and U.S. inflation data, overnight expiry implied volatility gains in the USD/major pairs appear limited, especially when compared to the significant increase for Friday's U.S. jobs data.
Overnight expiry EUR/USD implied volatility is 9.0 from 8.0 before including the debate and U.S. CPI - a break-even for a simple vanilla straddle of 42 from 37 USD pips in either direction. For context, it was 14.75 implied volatility or 68 USD pips before Friday's U.S. jobs data.
Overnight AUD/USD implied volatility is 15.0 from 13.0 - a premium/break-even of 42 USD pips from 36 USD pips. It reached 21.0 implied volatility or 59 USD pips before Friday's jobs data.
Overnight USD/JPY implied volatility is barely changed at 19.5 - a premium/break-even of 117 JPY pips in either direction. That contract reached 31.0 or 185 JPY pips before the jobs data. Related nL1N3KS088
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Overnight expiry FXO implied volatility https://tmsnrt.rs/4d5DYV4
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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