NZD/USD options on high alert for RBNZ volatility
Oct 8 (Reuters) -Overnight expiry options now factor in Wednesday's Reserve Bank of New Zealand policy decision, with a significant spike in NZD related premiums reflecting the anticipated surge in FX volatility following the announcement.
FX implied volatility stands in for the unknown, yet key parameter of the option premium - actual/realised volatility. For a regular vanilla FX option, the higher the implied volatility, the more expensive the premium, and vice versa.
Since including the RBNZ decision, overnight expiry NZD/USD implied volatility has jumped from 12.0 to 19.0. That is an increase in the premium/break-even from 30 USD pips to 48 USD pips in either direction. For context, overnight expiry implied volatility peaked 20.5 or 52 USD pips for Friday's U.S. NFP data and 23.0, or 59 USD pips for the Aug. 14 RBNZ decision, which was a 2024 high.
The Reserve Bank of New Zealand is widely expected to cut rates by 50 basis points to 4.75% on Wednesday as the economy contracts, unemployment rises and inflation risks undershooting the 2% mid-point of the central bank's target band. Despite the almost certain outcome, however, the high FX volatility premium shows that option dealers are not complacent about the associated risk of additional realised volatility.
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NZD/USD overnight expiry FXO implied volatility https://tmsnrt.rs/3TZpvU4
Richard Pace is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond
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