FX Options Insights
FX option markets are signaling heightened concerns over currency volatility, driven by trade tariffs, political developments, and shifting policy outlooks. The recent introduction of trade tariffs on Canada, Mexico, and China has notably increased option-implied volatilities across related currency pairs.
While USD/CAD implied volatility has risen, it remains below February highs. The 1-month implied volatility surged from 8.9 to 10.0 between Monday and Tuesday before retreating to 8.5. For USD/MXN, the 1-month implied volatility climbed from 13.3 to 14.3, marking its largest premium over 1-month historic volatility since the U.S. election. In contrast, USD/CNH implied volatility saw more muted gains, with the 1-month figure reaching 3-week highs but staying 1.0 below the February 3 peak of 6.25.
EUR/USD implied volatility remains well-supported above both recent and long-term lows. Risk reversals have softened as EUR puts relative to calls declined, coinciding with spot prices rising above 1.0500. However, the premium still reflects persistent downside risks. Large EUR/USD option strikes around the 1.05 level could significantly influence FX markets, particularly ahead of Friday's U.S. jobs report. Current price action suggests limited confidence in a sustained EUR/USD rally beyond 1.0600 in the short term.
In other developments, CHF call options expiring after Wednesday's CPI release suggest expectations for stronger inflation data, which could strengthen the Swiss franc. Additionally, there has been modest interest in GBP call options against both EUR and USD.
For USD/JPY, options reflect strong interest in sub-150.00 JPY call strikes, even as the spot rate recently tested highs above 151.00 on Friday and Monday. A subsequent downturn brought it back below 148.56 on Tuesday. One-month implied volatility and the premium for JPY calls over puts on 1-month risk reversals have reached their highest levels since December, at 11.5 and 1.75, respectively. Traders continue to favor outright JPY call/USD put options, though knock-out triggers starting from 145.00 suggest a perception that breaking this level may be challenging in the near term.
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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!