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Implied volatility in FX options for USD and G10 currency pairs remains anchored near historical lows, signalling subdued market activity and limited directional catalysts amidst improved risk sentiment. While current levels may not scream "bargain" compared to recent realised volatility, the downside risk in implied vol pricing appears capped. For those looking to shield against potential FX risks, these calm conditions still provide relatively affordable hedging opportunities.
The EUR/CHF pair is flirting with a pivotal level near 0.9200, the lowest since the dramatic drop in 2015. A decisive break below this support could spark heightened volatility. There's growing interest in lower-delta CHF calls/EUR puts, which could surge in value if this critical threshold gives way.
Meanwhile, AUD/USD remains exposed to the downside due to weakening metal prices and uncertainties surrounding U.S.-China trade relations. A stronger-than-expected U.S. CPI reading on Friday or softer Australian inflation data next week could add pressure to the pair. Low-delta AUD puts might offer a compelling hedge, especially given last week's pullback in implied volatility and AUD put premiums.
USD/JPY continues to linger near the 152.00 mark, keeping implied volatility suppressed, now at 9.0 for the 1-month tenor compared to 10.45 last week. The premium for JPY calls over puts on 1-month 25-delta risk reversals has eased significantly, dropping from 1.1 to just 0.45.
For EUR/USD, implied volatility has drifted back to long-term lows, with realised volatility even lower—highlighting the lacklustre performance of the spot market. The premium for upside strike volatility over downside, as reflected in risk reversals, has nearly vanished for tenors under three months. This shift points to waning bullish conviction and a more balanced outlook for directional moves. Notably, if EUR/USD slips into the rumoured sub-1.1550 short gamma zone, volatility could see a notable uptick.
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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!