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Foreign exchange (FX) options are showing heightened activity as market sentiment shifts amid renewed risk aversion and looming macroeconomic uncertainties. The recent end of the U.S. government shutdown brought data risks back into focus, and now, a wave of cautious trading is driving demand for options and pushing implied volatility higher.
In the USD/JPY market, demand for downside protection surged even before the currency pair slid from 155.00 to the mid-153 range late last week. This led to a jump in one- to three-month risk reversals, with the premium for JPY calls over puts rising to 0.8 from 0.7 on Thursday. Implied volatility followed suit, with the one-month tenor climbing from 8.6 to 9.1.
The Swiss franc (CHF) also benefited from this risk-off sentiment, with implied volatility ticking higher across all expiration dates. Additionally, the premium for CHF calls over puts widened, reflecting increased demand for safe-haven assets.
In the EUR/USD space, one-month implied volatility rose to 6.5 from last week’s low of 5.25, while one-month risk reversals shifted to favor upside strikes, moving to a 0.35 premium from a previously neutral stance.
Meanwhile, the British pound (GBP) saw a spike in volatility as traders braced for potential turbulence tied to fiscal and political concerns ahead of the UK’s critical budget announcement on November 26. The options market reflected this uncertainty with higher premiums for downside protection.
The Australian dollar (AUD) had initially shown signs of optimism midweek, with options hinting at potential upside moves. However, the latest wave of risk aversion flipped sentiment, leading to increased demand for downside protection. AUD/NZD options saw a notable rise in implied volatility, hitting six-month highs.
Overall, FX options are signaling a clear shift in sentiment as traders navigate political risks, macroeconomic uncertainty, and heightened risk aversion. With key events like central bank decisions and the UK budget on the horizon, the options market is expected to remain dynamic as participants hedge against potential volatility in the coming weeks.
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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!