There has been a mild shift in sentiment since Friday's mixed U.S. jobs data lowered the probability of a 50bps U.S. Federal Reserve rate cut on Sept 18.
Demand and premium for FX options to protect against -term FX volatility and USD weakness was strong ahead of Friday's mixed U.S. jobs data, but it has been quick to revert lower since, despite the impending U.S. CPI data.
EUR/USD topside momentum fades with 1-month expiry 25 delta risk reversals falling back towards from 0.2 EUR put/USD call on Friday, while benchmark 1-month expiry implied volatility is 5.7 from 6.3.
FX options were really betting much on GBP/USD topside. One-month expiry risk reversals were unable to hold a brief and long-term high topside strike premium when spot peaked at 1.3266 on Aug 27, with the contract retaining a small downside strike premium since. Benchmark 1-month expiry implied volatility slips to 6.8 from 7.3.
USD/JPY was primed for a 140.00 barrier breach post NFP and although the timing has since been pushed back, option trade flows and downside strike premiums suggest the 140.00 level is still seen as vulnerable. USD/JPY 1-month expiry implied volatility rallied 11.9 to 13.75 last week and trades in the mid 12's since - retaining a solid premium to its G10 FX peers and highlighting its stronger correlation to the USD and wider risk sentiment.
The FX volatility risk premium for Wednesday's U.S. CPI data is far below that seen before Friday's NFP, which should give larger FX option strike expiries and related hedging flows greater rein within current ranges this week.
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(Richard Pace is a Reuters market analyst. The views expressed are his own)