BUZZ-FX options wrap - Wild swings in FX volatility fear gauges

Feb 4 (Reuters) - FX option implied volatility has closely tracked the sharp swings in actual FX volatility, driven by U.S. tariff-related headlines in recent sessions. However, these volatility risk gauges have eased since tariffs on Mexico and Canada were delayed for 30 days, raising hopes that other economies may also receive extended negotiation periods.

USD/CAD has been a key barometer of the unfolding tariff situation, with its 1-12 month implied volatility term structure reaching fresh two-year highs after the weekend's tariff announcement. But following the 30-day extension, implied volatility has fallen sharply.

EUR/USD's drop to fresh two-year lows at 1.0125 triggered renewed demand for implied volatility, pushing it back toward recent and 2-year highs. As EUR/USD regains and holds 1.0300, however, implied volatility is retreating toward last week's lows. Risk reversals saw EUR put over call premiums spike to new highs since July 2024, but they have quickly reversed lower as downside hedges are unwound.

USD/JPY implied volatility is back toward recent and 2-year lows as risk appetite recovers amid low FX realised volatility within familiar ranges. However, risk reversals retain a strong premium for JPY calls over puts to highlight what is still perceived to be the most vulnerable side of this market.

USD/CNH spot and implied volatility are attracting demand on setbacks, with traders not ruling out more topside potential.

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