The volatility risk premium attached to FX options is struggling to stay afloat as spot markets cling to familiar ranges amid a broader lack of direct
The volatility risk premium attached to FX options is struggling to stay afloat as spot markets cling to familiar ranges amid a broader lack of directional conviction. Traders remain reluctant to offload all their bets on future USD strength, but are not yet prepared to bet too much on a sustained USD fall.
Consequently, implied volatility has been under pressure through February and where there has been any increase, sellers have been quick to take advantage. It is also worth noting that the benchmark 1-month expiry included a wealth of major central bank policy meetings last week, which has helped to underpin related option prices.
USD/JPY implied volatility has posted the biggest recovery on a combination of JPY spot and call option demand. The 1-month expiry reached the low 11s where it met supply, from the low 9s prior. Risk reversals have increased their downside over upside strike premiums too.
A wealth of huge EUR/USD strike expiries are adding to congestion in a familiar 1.04-1.05 zone and could soon see implied volatility extend February 17 lows since November.
GBP/USD implied volatility sits just above its own mid-February and 2025 lows for now, while the mild bounce from last week’s fall to late summer 2024 lows in AUD/USD implied volatility has since peaked.
USD/CNH implied volatility looks set to extend its recent and lowest levels since August 2024 as reduced tariff-related volatility/CNH weakness recognises calmer climes.
Falling implied volatility and the removal of topside premiums in USD/INR options suggest the recent intervention has done enough to deter further USD/INR gains for now.
Month-end FX rebalancing favours a stronger USD, especially versus EUR.
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