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FX options wrap - Highlighting crucial FX changes

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Changes in FX option market implied volatility represents changes in realised volatility and its future expectations - highlighting some crucial signals.

Overnight expiry is now 10-am New York/15.00 GMT on Friday and therefore includes the U.S. jobs data, but related implied volatility gains were limited. This suggests the market isn't expecting any surprises to forecasts, or has underpriced the realised volatility risk that the data may ignite.

However, one-week expiry implied volatility has increased significantly since including next week's central bank policy meetings from the U.S., UK and Europe. It has achieved new longer term highs in all of the major currency pairs after gains in excess of 1.0 since Wednesday. The market isn't expecting any rate changes so the FX volatility risk is expected to come with the related rhetoric.

EUR/USD posted some decent implied volatility gains amid the setback from above 1.1000 to below 1.0800, with the benchmark 1-month expiry up almost 1.0 to 7.0. However, the biggest implied volatility gains were in USD/JPY over the last 24 hours amid the spot fall from 147.00 to sub 145.00 levels.

USD/JPY options had been warning of the spot setback risk to 145.00 but were still caught off guard by the speed and extent of the drop. Benchmark 1-month expiry implied volatility generated big profits for holders amid the rally to 10.25 Thursday from 8.8 on Wednesday and 1-month risk reversals reached a 1.5 vol premium for downside over upside strikes. Expect setbacks to remain limited while the spot market flirts with deeper USD/JPY declines, especially before key data and central bank risk.

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1-week expiry FXO implied volatility https://tmsnrt.rs/46RHqPY

1-month expiry FXO implied volatility https://tmsnrt.rs/3Tk8WTn

Overnight expiry FXO implied volatility since including Friday's U.S. NFP https://tmsnrt.rs/3RdomFZ

(Richard Pace is a Reuters market analyst. The views expressed are his own)


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