U.S CPI won't match NFP impact on FX, options show
Oct 10 (Reuters) -FX volatility is an unknown, yet key parameter of an FX option's premium, so dealers use implied volatility as a stand-in. The implied volatility attached to overnight options since their expiry included Thursday's U.S. CPI data is well below that seen before Friday's U.S. Non-Farm Payrolls (NFP), and the prior CPI data.
A perfectly priced FX option would see actual/realised volatility match implied volatility to cover its premium, so any disparity between the two makes FX volatility a tradable asset. Implied volatility changes for options where their expiries include major events like Thursday's U.S. inflation data will, therefore, provide an insight to the expected FX reaction.
USD/JPY is typically a sturdy bellwether for wider FX market volatility risk and its implied volatility for overnight (next day at 10 a.m. New York) expiry options since including the US CPI shows a minimal increase from 16.0 to 17.0. In premium/break-even terms, that is 99 JPY pips to 106 JPY pips in either direction. For context, overnight USD/JPY implied volatility was up at 28.0 or 174 JPY pips for the last NFP release and 23.0 or 143 JPY pips for September's U.S. CPI data.
AUD/USD is also sensitive to FX risk and volatility - its overnight expiry implied volatility has increased from 13.0 to 15.0 since including Thursday's U.S. CPI, but was 20.0 before Friday's NFP and 16.0 before the prior CPI release. Overnight expiry EUR/USD implied volatility has increased from 7.5 to 9.75 since including the US CPI data, but was 13.5 for the NFP and 12.0 for September's CPI release.
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Overnight expiry FXO implied volatility https://tmsnrt.rs/48i6wdr
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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