BUZZ-COMMENT-Plunging FX option premiums bring relief to investors
Jan 22 (Reuters) - The sharp decline in FX option premiums since Donald Trump's inauguration on Monday is welcome news for investors. It signals that traders in this forward looking FX derivative have avoided the immediate and near term risk of policy related FX volatility and further USD demand.
FX volatility is an unknown but key parameter of an FX option premium, so dealers use implied volatility as a stand-in. EUR/USD implied volatility has been at the forefront of a broader decline, as investors who were hedging the risk of heightened FX realised volatility quickly pared their positions.
While there was renewed demand for Canadian and Mexican related implied volatility when Trump talked about imposing related tariffs in early Asia Tuesday, the gains were far short of the pre inauguration peaks and have already started to falter.
Even Chinese Yuan FX options, which had been inflated due to Trump's campaign rhetoric targeting China, saw a rapid decline in implied volatility. A subsequent mention of potential 10% tariffs on China late Tuesday is far below the extreme measures previously threatened and was basically ignored.
This decline in FX option implied volatility is likely to encourage a shift back to riskier assets, which typically perform better in a low-volatility FX environment.
For more click on FXBUZ
(Richard Pace is a Reuters market analyst. The views expressed are his own)
((Richard.Pace@thomsonreuters.com))
Related Articles
What to Watch in Nvidia’s Q2 FY2026 Earnings: AI Growth, Margins, and Market Impact
TradingKey - NVIDIA Corporation (NASDAQ: NVDA) will report its Q2 FY2026 earnings on Wednesday, August 27, 2025, after the U.S. market closes. The earnings call is scheduled for 5:00 p.m. Eastern Time. With Nvidia being a bellwether in AI, gaming, and data center markets, and carrying significant...
U.S. July PCE and Q2 GDP Preview: With Rate Cuts Looming, Will U.S. Stocks Continue to Rise?
TradingKey - On 28-29 August 2025, the U.S. will release July PCE and Q2 GDP data. Market expectations suggest both headline and core PCE will rise 0.3% month-over-month, consistent with June figures. For growth, in line with the preliminary estimate on 30 July, the revised Q2 annualised real GDP gr
U.S. Dollar Index: Assessing Its Future Trend Through Macro Analysis of the U.S., Eurozone, Japan, and U.K.
TradingKey - Looking ahead, in the U.S., slowing economic growth combined with ongoing interest rate cuts will exert downward pressure on the dollar. In the Eurozone, weak economic performance and continued ECB rate cuts will likely depreciate the euro, indirectly supporting the U.S. Dollar Index...
Powell's Jackson Hole Speech: For U.S. Stocks, Hawk or Dove Signal Could Be a Lose-Lose?
TradingKey - As U.S. inflation and labor market data show signs of rebalancing, Treasury traders and Wall Street banks have largely priced in a rate cut at the September FOMC meeting — the first of 2025. Yet both a more dovish-than-expected tone and a potential surprise hawkish signal from Fed Chair
Eurozone Q2 GDP Commentary: Will the Euro's Upward Momentum Persist?
TradingKey - On 14 August 2025, Eurostat published Q2 GDP figures, revealing a drop in the Eurozone's quarter-on-quarter growth from 0.6% in the first quarter to 0.1%. Consequently, annual growth eased from 1.5% to 1.4%. The slowdown primarily stems from the diminishing boost from European...
