FX volatility risk premiums for options covering Friday’s U.S. jobs report are at their highest levels since the U.S. election, with a strong bias toward further USD weakness.
Volatility is an unknown yet key part of an FX option premium, so implied volatility acts as a proxy. Any disparity between implied and actual/realised volatility can present trading opportunities. Overnight expiry options first included the U.S. jobs data from Thursday and have seen a notable implied volatility surge which has significantly increased the premium/break-evens.
The passing of Thursday’s European Central bank risk has allowed overnight EUR/USD premiums to ease slightly, but they remain nearly double last week’s levels at 75 USD pips in either direction for a simple vanilla straddle. Risk reversals continue to show a strong implied volatility premium for USD puts over calls, reinforcing expectations of further USD weakness.
For USD/JPY, the premium break-even for overnight expiry straddles has risen from an already elevated 136 JPY pips on Thursday to 150 JPY pips on Friday – almost double its average over recent weeks. The recent USD decline has also driven higher premiums for USD puts across USD/JPY risk reversals.
Meanwhile, the AUD/USD overnight expiry premium break-even has jumped to 40 USD pips in either direction, double its recent lows.
Given the recent and broad-based USD slide, weaker-than-expected U.S. jobs data could further accelerate USD losses.
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