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Foreign exchange (FX) option implied volatility has eased back from the peaks reached earlier this week. A slight return of calm and an uptick in risk appetite have improved sentiment across FX markets. Optimism around avoiding a renewed trade conflict between the U.S. and China, coupled with reassuring comments from Federal Reserve Chair Jerome Powell, has helped soothe investor concerns and reduced the demand for volatility hedging.
EUR/USD bounced back by 100 pips from its recent lows but ran into sell orders near the 1.1630-50 range and its 100-day moving average. Since then, it has drifted back towards the heavily discussed 1.1600 vanilla strike expiries, with more expected on Thursday. One-month implied volatility for EUR/USD has dipped by 0.5 to 6.75, and the 1-month risk reversal has shifted slightly back to favoring upside strikes after being neutral.
The AUD/USD pair saw the most notable moves, with 1-month implied volatility climbing by 2.0 points to 10.0 between Friday and Tuesday, before settling at 8.9 on Wednesday. The 1-month risk reversal also doubled its downside premium over upside strikes to 1.5 during the same period. However, setbacks have been relatively contained, as the strong correlation between spot prices and volatility continues to make it an attractive trade for now.
For USD/JPY, demand for downside strikes surged, driving up the premium for JPY calls on 1-month risk reversals to 0.85 from a previously flat position. This also pushed implied volatility higher as USD/JPY declined. Yet, the pair’s inability to break below the 151.00 level has prompted a resurgence of volatility sellers on Wednesday.
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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!