Latest G10 FX clues from forward looking FX options
March 31 (Reuters) -Given their forward looking nature and correlation with FX moves, price action in FX options can often offer clues about market sentiment and expectations.
A recent slump in FX option implied volatility is consistent with less actual volatility, certainly on a short term horizon, with many G10 benchmark 1-month expiries touching 2023 lows. The fading banking-crisis risk and impending long Easter weekend holidays add weight as the USD weakens within familiar ranges.
Option trade flows can prove indicative too, with steady sales of USD call options via risk reversal contracts showing the premium to buy USD against many other currencies is falling.
Option traders typically buy options where they think spot markets could be heading to protect against that risk. There was demand for EUR/USD strikes through the 1.09's this week, but minimal interest to buystrikes above 1.1000, where the market is thought to already be very congested. Trade flows also suggest GBP/USD topside buyers aren't yet betting on sustained gains above 1.2500, while AUD/USD option traders still seem happy to sell strikes in either direction for now.
Renewed buyers of short term expiry options could have benefited from the latest USD/JPY volatility, where there remains a focus on downside strikes. USD/JPY traders should beware of a significant volatility and downside risk premium for the April 28 BoJ policy announcement.
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Benchmark 1-month expiry FXO implied volatility in G10 FX majorshttps://tmsnrt.rs/3lPHqPf
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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