BUZZ-FX options wrap-Lack of FX conviction is taking its toll

FX volatility and rapid directional moves upon which FX options thrive have been lacking and that has pressured implied volatility in February.

However, despite its losses, implied volatility remained stubbornly overpriced compared to past realised volatility measures across many maturity dates in multiple currency pairs. This suggests it has more downside potential whilst the broader FX market continues to lack overall conviction and cling to limited and familiar ranges.

U.S. President Donald Trump confirmed his commitment to implement tariffs on Canada by the March 4 deadline, which prompted a sharp 2.0 spike to the low 9s for 1-week USD/CAD implied volatility which now expires on that date.

While USD/JPY continues to flirt with its downside, those now long of JPY calls are growing frustrated by the lack of follow-through. Implied volatility edges higher on spot lows, which is consistent with the higher premium for JPY calls over puts on risk reversals.

EUR/USD stays close to 1.0500, with many large strike expiries helping to contain the price action this week. Despite EUR/USD lacking conviction in either direction, risk reversals retain a relatively strong downside over upside strike premium, especially in longer dates. Implied volatility sits just above 2025 lows from mid February, with 1-month around 7.0 and 1-year 7.2.

February month-end FX hedge rebalancing flows are expected to favour the USD, especially versus EUR.

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

((Richard.Pace@Thomsonreuters.com))