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The foreign exchange market is experiencing a period of subdued realised volatility, with risk appetite bouncing back and pushing implied volatility to long-term lows. However, the USD has shown mild strength, sparking interest in select currency pairs as traders gear up for the delayed U.S. CPI data release on Friday. While implied volatility has softened for other dates, Friday’s options have drawn attention due to their added risk premium. This indicates that market participants remain cautious about the potential for a surprise in the CPI data that could shake up volatility.
The USD has strengthened modestly this week, staying within familiar boundaries, but even this slight move has been enough to reignite demand for implied volatility, especially given its currently suppressed levels. Lower implied volatility means cheaper premiums for standard options and hedging tools, making it easier for traders to capitalize on even minor market movements. Yet, the prevailing low-volatility environment continues to favor short-volatility strategies. For those looking to balance risk and reward effectively, structures like range binaries might be a smart choice, as they limit downside exposure.
Interestingly, when comparing realised (historic) FX volatility to implied volatility, the latter still appears somewhat inflated despite being at low levels. For instance, the one-week realised volatility for USD/CAD is the lowest among G10 currencies at just 2.2%, whereas the one-week implied volatility stands at 3.7%—and historically has never dipped below 3.0%. If USD/CAD follows the same price action as last week, it wouldn't justify the current premium being priced in. As traders await Friday’s CPI data, eyes remain on how these dynamics will play out and whether volatility will make a comeback.
It’s no shocker to see EUR/CHF options reflecting concerns over a potential deeper dip in the currency pair. The pair is currently testing the 0.9200 level, marking its lowest point since bouncing back from the dramatic 1.20-to-0.85 plunge in 2015. If the Swiss National Bank (SNB) decides not to step in, a break below the 0.9200 threshold could trigger a sharper decline and heightened volatility. In response, traders are snapping up options with strike prices below 0.9200, particularly those with expirations in the 1-2 month range.
Implied volatility for EUR/CHF is on the rise, with downside strikes trading at an additional premium. For instance, 1-month implied volatility has climbed from a long-term low of 3.5% to 4.5% as October unfolds. Meanwhile, risk reversals in the 1-2 month timeframe are showing over a 1.0 premium for CHF calls versus EUR puts, reflecting growing demand for downside protection. Early Tuesday, a 6-week option with a 0.9100 strike price (a CHF call/EUR put) was priced at 5.1, highlighting the market’s anticipation of further movement in the pair. All eyes remain on whether the SNB will act or let the market find its own course.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!