FX Options Insights
FX option implied volatility continues to show a generally weak trend, having surrendered most of its early March gains. However, a sharp decline in the Turkish lira, triggered by domestic political developments, has influenced the broader risk environment, bolstering the USD, JPY, and CHF.
The lira options market reacted noticeably, though the impact on G10 FX options remained limited and short-lived. The benchmark 1-month EUR/USD implied volatility traded within the 8.0-8.1 range, while the broader 1-12 month expiry term structure held steady throughout the session. On Wednesday, demand for downside strikes increased, leading to a modest recovery in the EUR put/USD call premium for the 1-month risk reversal, which rose to 0.125. For USD/JPY, the 1-month implied volatility initially climbed from 9.85 to 10.0 but later fell to a new low of 9.75. This marks a significant drop from the March 10 peak of 12.4, with further downside risks looming toward the mid-February pre-rally lows of 8.8. Additionally, the 1-month risk reversals have declined from 1.85 to 1.25, favoring JPY calls over puts since March 10.
Market focus now shifts to central bank policy announcements. The U.S. Federal Reserve is expected to follow the Bank of Japan's lead in keeping interest rates unchanged later on Wednesday. Despite this, the implied volatility for the overnight expiry is slightly elevated, reflecting heightened expectations of realized volatility tied to Fed Chair Jerome Powell’s press conference. Overnight options for GBP and CHF pairings are also seeing increased activity, as markets anticipate policy announcements from the Swiss National Bank and the Bank of England on Thursday.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!