FX option implied volatility is currently close to long-term lows, and the U.S. government shutdown has further exacerbated the situation by eliminating crucial upcoming data triggers. Dealers have started to reduce FX volatility premiums associated with important data releases prior to the shutdown. The overnight expiry, which would normally factor in heightened risks from Friday’s U.S. payrolls, now aligns more with a typical trading session, indicating a decrease in its event risk premium. This reduction in data risk has significantly impacted 1-month implied volatility, which is already near cycle lows. However, this expiry is becoming increasingly appealing as it captures both the Fed and BoJ decisions at the end of October. With the possibility of the U.S. shutdown extending, the 1-month tenor provides a timely hedge against postponed data risk.
EUR/USD options continue to exhibit a slight bullish tendency, although confidence has diminished since Q2. EUR calls are still priced higher than puts, indicating persistent interest in upside movement. Nevertheless, substantial strike expiries around the 1.1700 level are further restricting spot markets and putting pressure on implied volatility. In USD/JPY, there is a notable demand for downside protection, especially for expiries occurring after the October 30 BoJ meeting. Strength in one-week implied volatility suggests short-term risk to JPY due to this weekend's LDP leadership election. Even emerging markets are feeling the pinch, as USD/ZAR implied volatility is at its lowest since 2014, although interest in sub-17.00 strikes has curbed the decline. USD/CNH option volatilities are even lower, with the 1-month contract stagnating near a 10-year low at just 2.5.
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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!