FX Options Insight
Recent movements in foreign exchange markets indicate a cautious consolidation phase, with a persisting bearish outlook for the USD across multiple currency pairs. Implied volatility has completed its pullback from the spike in April—triggered by the initial announcement of U.S. tariffs—due to progress in U.S.-China trade discussions. However, increased demand surfaced on Tuesday as value-driven traders and hedgers sought to capitalize on lower premiums to protect against future volatility.
The implied volatility for USD/JPY recorded the largest rebound, accompanied by a significant recovery in the premium for downside compared to upside strikes, as indicated by risk reversal contracts. One-month expiry implied volatility rose nearly to 11.3 from almost 2.0, while 1-month and 3-month expiry risk reversals bounced back approximately to 2.45 and 2.65 respectively for JPY calls over puts. The upcoming trade discussions between Japan and the U.S. are a near-term risk factor for USD/JPY, while the extended China tariffs post-August 10 have drawn in some hedging activity.
In Asia, USD/KRW fell sharply after mid-week reports highlighted early May talks between the U.S. and South Korea on foreign exchange, reigniting worries about using currency manipulation as a bargaining tactic in trade negotiations. This shift caused a surge in USD/KRW option volatility, which increased demand for JPY hedges.
EUR/USD continues to trade within a range close to 1.1200, constrained by significant strike expirations amid a lack of fresh catalysts. One-month implied volatility increased midweek to 8.3 before stabilizing around 7.6, recovering from Tuesday’s low of 7.1. Risk reversals exhibit a substantial premium for topside risks over downside, with persistent demand for EUR calls against USD puts, indicating the market is still hedging against potential gains for EUR/USD.
A similar trend is observed in GBP/USD, with implied volatility remaining above recent lows and risk reversals sustaining a five-year high premium for topside versus downside strikes.
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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!