FX option implied volatility has been under the cosh since U.S. President Donald Trump’s threat of heavy day one tariffs failed to materialise and prompted a paring of related FX volatility risk premiums.
Those who initiated short vol strategies at the start of the week would have made some big profits, but many of those have now been booked to help stem the implied volatility slide, since.
EUR/USD implied volatility led the plunge, with 1-month falling 2.0 vols before finding support at 7.4 and 1-year at 7.2 from 8.0. Shorter dates may have a little more downside potential if Friday’s PMI data passes without volatility, as overnight option prices suggest they should.
GBP/USD 1-month expiry implied volatility met demand sub 8.5 from highs near 11.0 last week. The lesser threat of spot extending its recent slump through big 1.2000 option barriers/stops has added weight and removed some of the downside strike premium from risk reversals.
The Bank of Japan is expected to hike rates by 25bps to 0.5% on Friday. Overnight expiry USD/JPY implied volatility gained almost 7.0 to 19.25 – a break-even of 75 JPY pips to 125 JPY pips, which is still the lowest for any BoJ meeting since June.
USD/CAD 1-month expiry implied volatility is well supported at 8.0 after bouncing from 7.25 setback lows amid the threat of Feb. 1 trade tariffs.
USD/CNH implied volatility fell toward new 6-month lows amid the spot setback and consolidation due to a diminished trade tariff threat.
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