US Markets

BUZZ-COMMENT-Fed risk flashes on the FX options radar

Credit: REUTERS/KAI PFAFFENBACH

FX option implied volatility retreats from this week's recovery highs as markets settle after recent risk aversion and USD volatility, but one-week expiries aren't participating since capturing Wednesday's U.S. Federal Reserve policy decision - warning of its potential to be the next FX volatility catalyst.

April 22 (Reuters) - FX option implied volatility retreats from this week's recovery highs as markets settle after recent risk aversion and USD volatility, but one-week expiries aren't participating since capturing Wednesday's U.S. Federal Reserve policy decision - warning of its potential to be the next FX volatility catalyst.

FX options thrive on volatility. It's an unknown when determining premium, so dealers use implied volatility to gauge expectations - if actual volatility matches implied, it should cover the premium. Broader implied volatility setbacks reflect a calmer near-term outlook, but the sustained bid in one-week options means dealers expect more volatility from the Fed.

That additional volatility premium and expected FX break-evens will be clearer to see when overnight option expiries roll over the FOMC from Wednesday. Overnight expiry options correctly warned USD/CAD dealers not to be complacent before Wednesday's Bank of Canada policy announcement , but they suggest today's European Central Bank policy announcement won't be market moving .

For more click on FXBUZ

1-week expiry implied volatilityhttps://tmsnrt.rs/3xeVxy9

Benchmark 1-month expiry implied volatilityhttps://tmsnrt.rs/3sG7l9l

(Richard Pace is a Reuters market analyst. The views expressed are his own)

((Richard.Pace@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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