BUZZ-FX options wrap - Stronger USD lacks the required spark

Despite a lack of realized FX volatility, broader implied volatility remains supported above recent and long-term lows. This persistent resilience reflects the underlying uncertainty surrounding market direction and volatility, a sentiment that has lingered since the USD's mid-February setback.

While the USD regained some ground on Thursday, broader ranges remain intact, and the much-needed catalyst for a decisive move is still missing. EUR/USD implied volatility has become increasingly attractive following its recent declines and would benefit from a breakout — particularly to the downside. One-week expiries now include next Thursday's ECB policy announcement, yet the muted implied volatility response suggests limited expectations for realised volatility, as a 25bps rate cut is already fully priced.

There has been some movement in JPY-related options, with hedge funds among those buying JPY calls and lifting implied volatility since USD/JPY broke below 150.00. Thursday's mild USD recovery nudged USD/JPY back toward 150.00 but ultimately made downside options cheaper, attracting renewed demand. JPY call spreads and JPY calls with knock-out triggers look enticing.

Meanwhile, shifting headlines on U.S. trade tariffs have fuelled USD/CAD options trading this week. Implied volatility and topside strikes initially spiked when Trump reaffirmed commitment to the March 4 deadline, only to retreat when he later suggested an extension to April 2. Uncertainty over the exact date and extent of tariffs keeps USD/CAD volatility and topside risk premiums firmly underpinned.

Month-end flows are said to favour the USD and not EUR, so next week may bring more clarity as markets gear up for February's key U.S. NFP data.

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

((Richard.Pace@Thomsonreuters.com))