BUZZ-FX options wrap - Volatility risk cull slows as Fed looms

FX option volatility risk premiums plunged from Monday's highs as Donald Trump's threatened trade tariffs failed to materialize. However, the pace of declines has since moderated, as the reduced premiums present more attractive entry levels ahead of potential volatility risks tied to next week's U.S. Federal Reserve and European Central Bank policy decisions.

USD/JPY implied volatility has extended its six-month lows after Friday's expected Bank of Japan rate hike to 0.5%. The curve should stay heavy as spot clings to familiar ranges and realised volatility measures remain subdued.

EUR/USD tested new recovery highs above 1.0500 amid the better risk appetite and weaker USD on Friday, which keeps pressure on implied volatility. However, 1-week implied volatility finds support in the upper 8's since including the Fed and ECB on Thursday. One-month losses from the low 9's have since stalled before 7.0 and 1-year touched 7.0 Friday from 8.0 on Monday.

GBP/USD 1-month implied volatility is also down around 2.0 since Monday - trading 8.25 on Friday.

AUD/USD 1-month ends the week at 9.0 from 11.0 and 1-year at 9.6 from 10.5 - close to initial post-U.S. election setback lows and with the potential for more losses if the improved risk sentiment and weaker USD are maintained.

USD/CNH implied volatility nears lows since August after this week's heavy declines. USD/CAD implied volatility has been much slower to ease since bouncing from its initial setback lows on Tuesday as Trump threatened 25% tariffs on Canada from Feb 1.

Larger FX option expiries for the week ahead nL2N3OK09S

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