FX Options Insights
President Donald Trump's remarks on tariffs on Thursday reduced risk appetite, leading to widespread USD strength, with the CAD suffering the most. Implied volatility remained elevated above both recent and long-term lows across major currency pairs, drawing renewed interest as the USD surged.
Markets are closely watching the potential implementation of tariffs on Canada, Mexico, and China by March 4, which is expected to sustain elevated implied volatility, particularly for USD/CAD. The pair has already experienced significant realized volatility this week.
Focus will also shift to Friday's U.S. jobs report for clues on Fed policy and USD direction. A volatility event risk premium is now evident in 1-week expiry FX options.
EUR/USD implied volatility, alongside its downside and upside strike premiums, rewarded holders after the spot rate dipped below 1.0400. However, hedging flows tied to large expiries and expectations of a productive meeting between Trump and Ukrainian President Volodymyr Zelenskiy on Friday kept the spot rate steady around 1.0400, leading to increased option supply.
GBP/USD demonstrated greater resilience as the UK seeks to avoid tariffs and secure a new trade agreement with the U.S. Nonetheless, it faced headwinds from USD strength, which drove up its implied volatility.
In USD/JPY, demand for downside strikes pushed implied volatility and JPY call premiums on risk reversals to multi-week highs after the spot rate fell below 150.00 on February 20. Although it rebounded to 151.00 on Friday, the recovery had minimal impact on option prices.
AUD/USD implied volatility saw a further boost amid the latest spot rate decline, with the 1-month figure rising to 10.0 from last week's 8.3, a level that now appears elevated compared to the past month's daily realized volatility of 6.7.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!