FX options wrap - FX volatility and USD risk premiums elevated

A weaker USD and stronger EUR and to a lesser extent a stronger JPY were the main drivers of FX options this week - boosting related implied volatility and premiums for USD puts over calls.

Overnight expiry implied volatility including Friday's monthly U.S. jobs data reached its highest levels since the U.S. election and highlighted a market that was probably still short of USD puts and alert to the risk of a weak data set providing the catalyst for a deeper USD rout.

The data was only just below expectations and the FX reaction was consequently limited. However, the USD remains weak and prone to further losses and that's limiting overall setbacks for implied volatility and its USD put premium.

Directional trade flows in the major pairings have been keen to cover for GBP/USD regaining 1.3000 and EUR/USD above 1.1000 in the short term. EUR call spreads and EUR calls with reverse knock out triggers are said to have been well sought this week. Short covering of EUR calls was also evident in risk reversals, with sub 3-month expiries flipping to a EUR call from a EUR put premium and subsequently reaching their highest lvels for topside strikes since 2022 and 2020.

USD/JPY options continue to favour the downside via various strategies including those that are leaning on existing 145.00 strike barriers to cheapen their premiums.