BUZZ-COMMENT-Are options under pricing U.S. NFP risk to FX?

Aug 31 (Reuters)Foreign exchange markets, which have seen decent volatility surrounding this week’s U.S. consumer confidence and JOLTS data, could be under-pricing FX volatility risk from Friday’s non-farm payroll data.

FX volatility is an unknown parameter when pricing FX options so dealers use implied volatility – their best guess, with any disparity between implied and realised volatility therefore creating a trading opportunity.

Overnight options expire at 10 a.m. New York time (1400 GMT) on Friday so include the NFP and wider jobs data, but they also include Thursday’s U.S. PCE and initial jobless claims. While higher overnight expiry implied volatility recognises the data risk to realised volatility before Friday’s expiry, its gains have struggled to match those seen before the Aug. 4 jobs data.

Overnight expiry EUR/USD implied volatility adds 2.0 to 11.5 – a breakeven for a simple vanilla straddle of 52 USD pips from 42 USD pips in either direction. The market has also yet to respond to inflation data from the eurozone Thursday.

USD/JPY implied volatility from 10.5 to 13.5 o 64 JPY pips to 82 JPY pips and AUD/USD from 14.0 to 16.0 or 38 USD pips to 43 USD pips in either direction.

Broader FX option implied volatility has slipped with the USD as FX recovers familiar ranges. That heightens the risk of a USD bounce and increased volatility should the jobs data be stronger than forecast.

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Overnight FX option implied volatility

(Richard Pace is a Reuters market analyst. The views expressed are his own)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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