FX options wrap - U.S politics ignored, CB policy drives
Little reaction in the FX options market to news that U.S. President Joe Biden wont run for another term. If anything, volatility premiums around the U.S. election are marginally lower, but a broader lack of FX realised volatility is still weighing on option premium into the typical summer doldrums.
The U.S. Federal Reserve and broader central bank policy remain the drivers for FX and volatility if there's any diversion from currently predicted paths. U.S. PCE data is key for the U.S. dollar this week and could heighten the risk of a July 31 rate cut if it misses expectations (25bps not fully priced until September 18).
EUR/USD option implied volatility remains the lowest of major USD pairings - trading just above long term lows and with a lack of near term directional bias. That's also the case in 1-week options that include EZ pmi and the U.S. PCE. The expiry of billions of nearby option strikes may yet loosen the FX hedging shackles.
However, AUD/USD options have shown some concerns about further FX declines amid China's economic concerns and falling commodity prices. Benchmark 1-month expiry implied volatility reached 8.6 Monday from 8.0 on Friday and also increased its downside over upside strike premium via risk reversals.
USD/JPY option implied volatility edges lower amid a lack of realised volatility. However, there was a shift in demand and premium toward JPY calls last week to suggest a higher perceived downside vulnerability to USD/JPY spot.
For more click on FXBUZ
1-month expiry FXO implied volatility https://tmsnrt.rs/4fbOqg4
EUR/USD 1-week 25 delta risk reversal https://tmsnrt.rs/3LFfUgl
USD/JPY FXO - 1-month 25 delta risk reversals https://tmsnrt.rs/3YdmoL3
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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