BUZZ-FX options wrap - Pricing reflects current FX situation

Current option market pricing is consistent with a lack of actual/realised volatility and improved risk sentiment. The USD call over put premium for many currency pairs has also been reduced to reflect the recent USD setback from 2-year highs to 2-month lows.

However, implied volatility has started to find some demand after the sharp setbacks from last week's highs. EUR/USD 1-month expiry implied volatility is down over 2.0 in February from 9.0 to 6.9 and 1-year from 8.0 to 7.0. Potential profit on typical 30 million euro short straddle between those levels is around 139,000 euros for 1-month and 234 million euros for 1-year.

It's a similar situation in other currency pairs, although USD/JPY has been the G10 laggard as its realised volatility has outperformed peers. There's also been interest to buy downside strikes and cover the risk of increased USD/JPY volatility should the psychological 150.00 level eventually break.

AUD/USD implied volatility trades new long-term lows after the RBA's hawkish rate cut kept AUD/USD upside momentum intact. Overnight expiry implied volatility gains on Tuesday suggests that Wednesday's RBNZ policy decision can generate more NZD related realised volatility than the RBA did for AUD or AUD/NZD on Tuesday.

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