The FX outlook according to options
July 3 (Reuters) -FX options are forward looking and thrive on FX volatility and directional moves, so their price action and trade flows can offer clues on the perceived FX outlook.
Implied volatility gauges the unknown realised volatility risk, which is key to an option premium - it's on the back foot in many of the most commonly traded G10 currency pairs.
Benchmark one-month expiry implied volatility and its premium for downside versus upside strikes in EUR/USD options has almost fully retraced the significant gains posted after the French election was announced on June 10. This shows a low perceived probability of a second round upset that could increase realised volatility and hurt the euro.
GBP/USD one-month expiry implied volatility is close to the post-pandemic lows from March at 5.5 and its downside over upside strike volatility premium on risk reversal contracts is falling. Price action is consistent with continued low realised volatility in familiar ranges and less risk of a sudden GBP/USD drop, despite the impending UK election.
USD/JPY option implied volatility has also peaked for now and although setbacks are limited and downside strikes retain a premium to higher strikes, they are well below levels seen when intervention was an all consuming and significant risk before being realised in late April.
Price action in some of the emerging market currencies highlights a greater risk of volatility. Higher USD/ZAR implied volatility premiums are proving justified since the South African election. USD/CNH trade flows show expectations of more Yuan weakness and options to hedge those positions.
For more click on FXBUZ
Benchmark 1-month expiry FXO implied volatility https://tmsnrt.rs/3RU23q3
1-2-week USD/ZAR FXO implied volatility https://tmsnrt.rs/4cqyCnY
eur 1-month and 1-year 25 delta risk reversals https://tmsnrt.rs/3XOsSjf
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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