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Implied volatility serves as a crucial indicator for the market's perception of future foreign exchange (FX) volatility risk. The recent increase in implied volatility reflects growing uncertainty among various currency pairs, signaling that market participants are anticipating more pronounced fluctuations in currency values.
There is a notable trend toward favoring shorter-dated expiry dates for options, as these are generally more advantageous during periods of heightened spot market volatility. This shift in preference comes in the context of several key developments, including the release of important U.S. economic data, diminishing expectations for Federal Reserve interest rate cuts, and recent declines in equity markets. Collectively, these factors have contributed to a waning risk appetite among investors and have led to an elevation in FX volatility risks.
Specifically, the 1-month expiry implied volatility for USD-related currency pairs has experienced a surge in demand and associated premium, particularly following the announcement of the U.S. Federal Reserve's rate decision scheduled for December 10.
In the UK, anticipation surrounding the upcoming budget is influencing the GBP, with implied volatility for GBP reaching levels not seen in two months. This has resulted in an increased premium for GBP put options compared to call options, effectively granting investors the right to sell GBP instead of buying it. Reports from dealers indicate that there is active buying interest in GBP/USD puts with strikes below 1.3000, as well as interest in EUR/GBP options with strikes above 0.8900, with expirations set for December and January. Notably, the 1-month implied volatility for EUR/GBP has been trading at relatively high levels since May.
In the realm of safe-haven assets, the Swiss Franc (CHF) has seen a rise in 1-month implied volatility for both USD/CHF and EUR/CHF currency pairs, pushing these values to their highest points since August. This trend has also boosted the premium on CHF call options over put options, indicating greater demand for bullish positions. Similarly, the Japanese Yen (JPY), known for its safety attributes, has also experienced an uptick in implied volatility and an increase in call premiums in recent sessions, reflecting ongoing investor interest in sheltering funds amid uncertain market conditions
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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!