BUZZ-FX options wrap - Shifting outlooks and simmering risks

FX option markets reflect worries about FX volatility relating to trade tariffs, political developments and shifting policy outlooks. That comes after newly implemented trade tariffs on Canada, Mexico and China boosted related option implied volatilities.

Although significant, USD/CAD implied volatility gains failed to threaten highs from early February - benchmark 1-month spiked 8.9 to 10.0 Monday-Tuesday before quickly falling to 8.5. 1-month USD/MXN reached 14.3 from 13.3 and remains firm - its biggest premium to 1-month historic volatility since the U.S. election. USD/CNH implied volatility gains were more limited with 1-month already trading 3-week highs, yet still 1.0 below a February 3 peak of 6.25.

EUR/USD implied volatility remains well supported above recent and longer- term lows. Risk reversals retreat from higher levels for EUR puts over calls amid spot gains above 1.0500, but retain enough premium to highlight simmering downside fears.

Big EUR/USD strikes expiring in the 1.05's may exert a greater influence on FX if all else fails to excite before Friday's U.S. jobs data. Price action still shows a lack of conviction for a protracted EUR/USD upleg beyond 1.0600 near term.

Other recent trade data of interest includes CHF call options expiring after Wednesday's CHF CPI print, hinting at a higher perceived potential for firmer numbers leading to a higher CHF. There's been light demand for various GBP call strikes against EUR and USD.

USD/JPY options maintained conviction for sub 150.00 JPY call strikes when spot retested highs above 151.00 Friday/Monday. That proved founded amid a downside resumption to longer term lows sub 148.56 on Tuesday. One-month expiry implied volatility and the JPY call over put premium on 1-month risk reversals traded new highs since December at 11.5 and 1.75 respectively.

Traders are still buying outright JPY call/USD put options, but its worth noting that some have attached knock-out triggers from 145.00, suggesting a perception of that level proving tougher to crack near term.

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(Richard Pace is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond)

((Richard.Pace@Thomsonreuters.com))