FX options wrap - Value potential after post election slump
Broad based FX option implied volatility was hit hard as risk premiums were priced out as soon as it became clear that Donald Trump would win the U.S. election, with the lower levels now potentially offering decent entry levels.
That's certainly the case in EUR/USD, with the three month expiry implied volatility staging a solid bounce from 6.35 to 6.8 on Wednesday and meeting more demand after easing again on Thursday. Three month FX option expiry includes the start of Trump's presidency and any FX volatility relating to his policies.
German politics, weak EU growth and yield differentials are expected to keep EUR/USD under pressure, so current lower implied volatility and USD call risk reversal premiums can offer value.
USD/JPY 1-month expiry implied volatility is currently trading newlows since July below 11.0, but dealers report demand for USD call spreads and long dated expiry demand for 160.00 strikes, which would benefit from a slow USD/JPY grind higher.
AUD/USD has staged a decent recovery above 0.6600 from initial post election losses by 0.6500 and 1-month implied volatility has dropped a substantial 3.0 to 9.25.
Markets expect the U.S. Federal Reserve to match Thursday's 25bps Bank of England rate cut. Overnight expiry options aren't pricing a significant FX reaction, but they aren't complacent about the potential for some related volatility.
For more click on FXBUZ
1-month expiry FXO implied volatility https://tmsnrt.rs/48IZvCC
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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