BUZZ-COMMENT-When will FX volatility pick up from 2-year lows?

March 4 (Reuters) - FX volatility as measured by FX options is the lowest in over 2 years and shows no sign of increasing, so what will it take for that to change?

FX options gauge expectations of FX realised volatility with implied volatility when setting the premium. Any disparity between realised and implied volatility over the life of that option therefore creates a trading opportunity.

Implied volatility has been trading at ever new 2-year lows in early 2024, as has historic volatility - past FX realised volatility and a fair value measure for implied volatility.

FX volatility is typically driven by the outlook and implication of policy and interest rate divergence and often led by the U.S. Federal Reserve. However, despite the extent of Fed rate cuts being reduced and the timing of those cuts being extended, the rate view in other major economies has been adjust in a similar fashion.

Until there is some divergence in interest rate expectations, FX volatility will remain depressed and option implied volatility low, which will keep the focus on economic data releases for clues on the policy outlook.

For more click on FXBUZ

3-month historic (past realised ) volatility

3-month expiry FXO implied volatility

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


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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