BUZZ-FX options wrap - Tension builds as uncertainty reigns

Implied volatility substitutes actual/realised FX volatility - a key yet unknown parameter of an FX option premium. Despite a lack of traders conviction and subdued realised volatility, implied volatility remains supported above recent and 2025 lows. This resilience underscores the underlying fear and uncertainty that continue to haunt the FX market.

EUR/USD is a prime example - the spot market is barely realising any volatility as the hedging of huge expiries helps to contain it, yet implied volatility is edging marginally higher. Risk reversals retain a downside strike premium to highlight the direction that's deemed most vulnerable, for now.

The USD/JPY options market has seen strong demand for JPY call options since the 150.00 level was broken, lifting implied volatility and downside over upside strikes to new 2025 highs on risk reversals. While outright downside vanilla options are now quite expensive, there's better value if spreading JPY calls or adding knock-out triggers below the strike.

USD/CAD implied volatility and CAD put premiums on risk reversals are outpacing any spot gains and highlight the severity of the perceived threat from impending U.S. trade tariffs.

GBP/USD and AUD/USD implied volatilities also trade above their recent and longer-term lows, despite their own lack of spot volatility.

Month-end FX hedge rebalancing flows are now in the mix and are said to favour the USD, so perhaps there could be some USD weakness going into next week.

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

((Richard.Pace@Thomsonreuters.com))