OPTIONS
- The persistent and one-way slide in front-end implied vols signals the prevalence of vol-selling in G10 - a strategy that could be caught offguard by any renewed USD rally.
- No surprise to see atypically low FX options volumes yesterday given the US Presidents' Day holiday - and markets aren't doing much to make up for it today. Total notional traded is well below average for this time of day, and won't be helping the continued slide in vols: EUR/USD 1m implied has stabilised, but is still at a YTD low below 7 points.
- The persistent pullback in implied off January's highs may only run so far: realised 1m vols across EUR/USD and GBP/USD are still sticky and close to highs. While this will undoubtedly moderate given the recovery in spot, the realised/implied 1m vol ratio is abnormally high. This metric hit the highest level since 2022 this week - a further signal that the market's expectations for Trump to upend the market are yet to come to pass - likely due to the delayed installation of tariffs.
- That said, the pace of the decline in implied is significant: particularly as the market monitors a new tariff deadline for Canada & Mexico, an ECB projection meeting, the opening of US-Russia negotiations and the April 1st report on America First Trade Policy - all of which pose risks to the February fade in the USD Index, and present considerable event risk.
Figure 1: Realised/Implied vol rank, EUR/USD 1m realised/implied ratio
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