Forex options remain unusually calm as U.S. CPI risk is seriously underestimated
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- Foreign exchange volatility is a key factor in option pricing, yet the overnight implied volatility currently does not reflect the market’s concerns around the US CPI data scheduled for Tuesday. The overnight implied volatility of major USD pairs against G10 currencies is virtually unchanged compared to last week’s average level, and even lower than the increase seen ahead of the US employment data release, despite the CPI data being of clearly greater importance.
- Geopolitical conflicts have pushed US gasoline prices above $4 per gallon, driving inflation to near two-year highs. Rising oil prices elevate overall inflation, and if sustained may further intensify underlying price pressures, thereby providing justification for maintaining high borrowing costs. Against this backdrop, the lackluster forex option pricing becomes increasingly difficult to rationalize.
- Specifically, EUR/USD overnight implied volatility stands at 8.0, corresponding to a breakeven point for straddle options of just 40 points, whereas before the employment data it rose from 8.5 to 10.5. AUD/USD implied volatility is 12.5, equating to a breakeven of 38 points, and during the employment data period it rose from 12.5 to 15.0. USD/JPY implied volatility is 11.75, far below the increase triggered by the employment data which rose from 13.5 to 15.5.
- Despite facing multiple risks such as geopolitical tensions, disruptions in crude oil supply, UK political uncertainty, and Japanese intervention threats, implied volatility across most G10 currency pairs for various maturities remains at its lowest level since February, with some pairs even touching longer-term lows. The options market appears to be temporarily choosing to ignore these risks.
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