FX options wrap: Fear gauges drop, BoJ risk muted
TLT•Broader foreign-exchange implied volatility has fallen after the Fed decision, while overnight USD/JPY volatility remains elevated ahead of Friday’s BoJ decision. One-month EUR/USD implied volatility fell to 5.9 from 6.5 before the Fed, and one-month USD/JPY volatility stood at 6.85.
1. Volatility eases broadly
Broader FX implied volatility has fallen as the Fed decision passed without fanfare and realised volatility remained low. With no fresh spot-market catalyst, option buyers have backed off. Benchmark one-month EUR/USD implied volatility fell to 5.9 from 6.5 before the Fed, below the five-month high of 7.25 reached on October 1.
2. BoJ decision in focus
Overnight USD/JPY is the only contract holding up ahead of Friday’s BoJ decision, with implied volatility around 12.0 and a break-even of about 80 pips. That is above the recent average of around 8.0, or 53 pips, but about half the level before the September 18 BoJ meeting, when the bank raised rates to 1.25%. The premium is restrained because the market is not expecting a rate hike until December; guidance on December is seen as the likelier source of volatility. One-month USD/JPY implied volatility is 6.85, compared with daily realised volatility of 4.5.
3. Currency levels and expiries
EUR/USD dipped after the ECB decision but remained above support and option barriers at 1.1100. Implied volatility and downside risk premiums had eased before the announcement and remained heavy afterward; if spot recovers toward 1.1200, implied volatility should continue its decline. Friday expiries include EUR/USD positions at 1.1100 (€1.8 billion), 1.1150 (€5.5 billion), 1.1175 (€2 billion) and 1.1200 (€4.2 billion), alongside large USD/JPY, AUD/USD and USD/CAD expiries. NZD-related option setbacks were limited after the RBNZ’s surprise rate hold, with New Zealand elections approaching.
