FX options wrap - Plenty of FX insights and warnings

There have been further shifts in FX option implied volatility and outright trade flows which can offer both insights and warnings about FX.

Benchmark 1-month expiry captured U.S. and Eurozone policy decision dates to boost related implied volatility mid week. The biggest boost was 1-month USD/JPY when its expiry captured the 28 July Bank of Japan policy decision from Thursday, which flags a perceived increase in the risk of the BoJ tightening policy to help stem the recent JPY decline. Broader USD/JPY implied volatility gains with a significant increase to historic volatility (fair value) highlights the current BoJ intervention risk premium.

Strong demand for USD/CNH implied volatility and CNH puts over calls reflects the fear of further spot gains and volatility. AUD/USD implied volatility is well below recent historic measures to suggest good value, especially with two RBA and one Fed meeting within the 1-month expiry.

A recent increase in downside strike premium via GBP/USD and EUR/USD risk reversals anticipated the setbacks in those spot markets that went on to underpin implied volatility. Big option strike expiries played a role in FX price action and dealers should be mindful of next week's bigger strikes.