COMMENT-FX reaction to U.S. CPI data - according to FX options
FX volatility is an unknown but key part of an FX option premium so dealers use implied volatility as a stand-in. Any changes to implied volatility when an expiry date includes a major event can therefore offer clues about the potential FX reaction to that event - and there are big price changes for Wednesday's U.S. CPI data.
Overnight New York cut options expire the next working day at 10-am New York/3-pm London and are the best gauge for short term event risk premium. Since those options included Wednesday's U.S. CPI data they have seen a significant increase which clearly shows the FX options market is on high alert and expects actual/realised FX volatility to also increase significantly as the data is released.
Overnight expiry EUR/USD implied volatility is by 2024 highs at 13.0 from 7.0 before including the U.S. CPI. The premium/break-even for a simple vanilla straddle has also almost doubled from 31 USD pips to 59 USD pips in either direction.
Overnight expiry AUD/USD implied volatility trades new 2024 highs at 19.0 from 10.0 prior - a premium/break-even of 52 USD pips from 27 USD pips in either direction. Overnight USD/JPY implied volatility is 17.0 from 8.0 - a premium/break-even of 111 JPY pips from 52 JPY pips in either direction. USD/JPY implied volatility peaked above 25.0 during the recent alleged intervention, but current levels are still very high.
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