Mild USD recovery/consolidation takes front-end expiry FX option implied volatility off its most recent highs. However, setbacks are proving limited amid the strong demand and high premiums attached to post NFP options - reflecting the importance of this event to the scale of the September 18 U.S. rate cut.
Dealers expect overnight expiry USD/JPY implied volatility to be around 25.0 - a premium/break-even of 105 JPY pips when it eventually includes the NFP from Thursday - only the third highest NFP FX volatility risk premium in 2024. One-week expiry implied volatility will include the NFP risk premium from this Friday.
EUR/USD has seen a renewed pick-up in demand and premium for downside gamma, evidenced by strong and sizeable demand for short dated expiry EUR put options such as Monday 1.1050's at 6.3 on 400-million euros. Benchmark 1-month 25 delta risk reversals have also seen a sharp reversal to 0.1 from their 4-year highs at 0.4 for topside over downside strikes this week.
USD/CNH 1-month expiry implied volatility reached 5.3 from 5.1 and 1-month risk reversals were paid at 0.7 CNH calls over puts when spot dropped to threaten a 7.1000 breach in Asia.
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(Richard Pace is a Reuters market analyst. The views expressed are his own)