FX options wrap - Pricing says FX is still going nowhere fast
Another day of FX consolidation and limited volatility which keeps the pressure on FX option implied volatility.
EUR/USD tested below 1.0900 but lacked the impetus needed to excite the FX options market. The ECB is widely expected to cut rates by 25 bps on Thursday, so it would take a surprise hold to reignite related FX volatility. Overnight expiry implied volatility will signal the strength of that risk from Wednesday.
Recent USD/JPY gains were capped by 150.00 binary option barriers and related defence before the pair slipped back to 149.00. FX option demand for JPY calls over the Oct. 31 BoJ policy announcement suggests the market is hedging the risk of a stronger JPY reaction. The setback in premiums for 1-month expiry options might offer better value given its inclusion of the next monthly U.S. payrolls, U.S. election and November Fed meeting.
Falling GBP/USD implied volatility is telling for the near term outlook. Benchmark 1-month expiry has given back much of its U.S. election-inspired gains from 7.5 to 8.75 to trade 8.1 on Tuesday. Sellers of butterfly spreads in EUR/USD and GBP/USD are also in line with current low FX volatility expectations. However, strong implied volatility premiums for USD calls via 1-month risk reversals show that further USD gains are still a risk, especially if Donald Trump wins the US election.
For more click on FXBUZ
GBP/USD 1-month expiry implied vs 1-month realised volatility https://tmsnrt.rs/3NnQTYd
1-month expiry FXO implied volatility https://tmsnrt.rs/4f2io5l
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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