Major central banks now a big blip on the FX options radar
July 25 (Reuters) -The FX volatility/risk upon which FX options thrive is measured by implied volatility and it's much higher on 1-week expiries since they included central bank policy decisions from Japan, the U.S. and UK.
These gains highlight the extent of any additional FX realised volatility traders feel these events can generate.
One-week expiry EUR/USD implied volatility had been trading just above long term lows of 4.0 this week, reflecting the lack of FX realised volatility within familiar ranges that looks set to continue. From 4.5 on Wednesday, it's jumped to 5.5 - its highest level since early July - since expiry included the July 31 Federal Reserve decision, where a rate cut isn't being entirely ruled out.
One-week GBP/USD FX option expiry now includes rate decisions from both the Fed and the Bank of England and related implied volatility has increased from 5.3 to 7.0 since Wednesday, its highest level since mid June.
One-week AUD/USD has increased from 9.25 to 10.0 amid the Fed inclusion, although implied volatility gains in other dates suggest much of this increase can be attributed to continued AUD/USD losses.
No surprise to see 1-week USD/JPY implied volatility posting the biggest gains amongst its G10 FX peers this week as option markets ramp the cost of volatility and downside strike protection amid the relentless JPY gains. One-week USD/JPY implied volatility is up from 9.5 to 14.75 since expiry included the Bank of Japan decision from Wednesday and the Fed from Thursday - its highest level since April 29 BoJ intervention.
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(Richard Pace is a Reuters market analyst. The views expressed are his own)
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