BUZZ-FX Options wrap - USD swings keep FX volatility in check pre NFP

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A broad-based USD pullback weighed on FX option implied volatility in early European trading on Monday, following a Washington Post report suggesting Donald Trump's tariff policies would be scaled back. Trump later refuted the claims, however, prompting a partial USD recovery, though it failed to challenge its recent two-year high.

The headline-driven volatility serves as a reminder to option traders of the potential for similar market swings, especially when Trump is in a position to enact policy. This is likely to limit deeper setbacks in implied volatility

Very short-dated FX option implied volatility remains elevated ahead of Friday's U.S. Non-Farm Payrolls (NFP) report. Implied volatility for one-week expiries rose by 1.5 across major pairings on Friday, mirroring the gains seen ahead of the Dec. 6 jobs data release. While USD/JPY implied volatility appears subdued relative to its G10 FX peers, it still holds a significant risk premium when compared to historical and fair-value measures.

USD/CNH options reflect increasing concern over spot levels breaching 7.4000, with growing demand and higher premiums for upside strikes again on Monday. Meanwhile, USD/CAD saw a synchronised drop in both spot and implied volatility, accompanied by reduced premiums for topside strikes compared to downside strikes.

If G10 FX remains range-bound through Friday's jobs data, large soon-to-expire option strikes may exert their influence on spot prices.



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(Richard Pace is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond)

((Richard.Pace@Thomsonreuters.com))

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