FX options wrap - Euro vols surge again; U.S. CPI risk underpriced
The euro has beenunder broad-based pressure since France announced a snap election, with the benchmark 1-month expiry euro based FX option implied volatility becoming the bellwether for related FX realised volatility and directional risk.
EUR/USD 1-month expiry implied volatility reached 6.6 on Tuesday after initial gains from 5.1 to 6.0 Friday-Monday. Demand came as EUR/USD spot marginally extended Monday's 1.0733 low to fuel more downside short covering.
One-month 25 delta risk reversals extended initial 0.15 -0.55 gains to 0.65 EUR puts over calls on Tuesday - their highest downside strike premium since April.
Other expiry dates saw implied volatility extend gains, too - 3-month EUR/USD paid 5.8 to 6.1 on Tuesday from 5.35 on Friday and 1-year to 6.6 from 6.4. EUR/cross vols also got another boost - EUR/GBP 1-month extended gains from Friday's 3.75 low to 5.35 and 1-month EUR/CHF to 6.4 from 5.2. Contagion spread through other pairings, although their implied volatilities gained to a much lesser extent.
The USD has been on the front foot since Friday's NFP beat and the market is now awaiting Wednesday's U.S. CPI data and Fed policy announcement. Overnight expiry only includes the former until Wednesday itself, but related implied volatility appears woefully underpriced when compared to the additional gains before previous U.S. CPI releases.
Beware huge GBP/USD expiries at 1.2800 if Wednesday's UK data beats and/or U.S. CPI data misses expectations in a boost to GBP/USD. USD/ZAR implied volatility and topside strike premiums are at long term highs and warn of further potential for FX volatility and ZAR losses.
For more click on FXBUZ
1-month expiry FXO implied volatility https://tmsnrt.rs/45hiulX
Overnight expiry FXO implied volatility https://tmsnrt.rs/3RoOKhb
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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