FX options wrap - Flashing volatility and directional risk warnings

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Uncertainty surrounding the new Omicron variant and its effects on the economy and central bank policy are being compounded by thinning year-end liquidity issues and positioning - a cocktail of risk that is clear to see in FX option markets.

Implied volatility peaked on Monday after the Omicron news prompted initial panic, but setbacks proved minimal and fleeting, to reflect a strong perception of increased actual volatility into the end of the year.

Many investors are positioned long USD, especially against the low-yielding funding currencies such as EUR and JPY, which have seen larger implied volatility gains and short covering amid USD setbacks.

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EUR/USD 1-month implied volatility is just shy of Monday's 2021 high at 7.4, while 1-month risk reversals have pared the last of the long-standing EUR put/USD call (downside) volatility premium.

USD/JPY 1-month implied volatility is also close to Monday's 2021 peak of 8.5, while JPY call/USD put premiums on 1-month risk reversals rallied to new pandemic-era highs this week.

CNH options buck the trend to reflect limited angst, which should embolden investor appetite in the Yuan.

Benchmark 1-month expiry FX option implied volatility
EUR/USD 1-3-month expiry option risk reversals
USD/JPY 1-month expiry 25 delta risk reversals

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Richard Pace is a Reuters market analyst. The views expressed are his own

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