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Implied volatility in FX options continues to hold strong above realised volatility levels, highlighting a steady risk premium in the market. Dealers are pricing in caution as a mix of stock market losses, heightened risk aversion, upcoming U.S. economic data, and central bank policy uncertainties create a tense backdrop. All major currency pairs are seeing implied volatility trading at a noticeable premium compared to their historical or realised volatility metrics. Earlier in Q3, subdued price movements kept both historic and implied volatility at multi-year lows. However, this trend has shifted recently, as deteriorating risk sentiment and renewed U.S. data concerns—following the government shutdown—have driven implied volatility higher, leaving realised volatility lagging behind.
The EUR/USD pair provides a clear example of this divergence. Despite spot prices staying within familiar ranges with little excitement, both 1-week and 1-month realised volatility remain below 4.0. In contrast, 1-month implied volatility has surged significantly, climbing from 5.0 to 6.5 since early November. In the options market, risk reversal contracts still show a slight premium for EUR calls over puts, reflecting a perceived higher likelihood of EUR/USD gains than losses. However, this premium is shrinking as the lack of upward momentum in EUR/USD tempers expectations.
Turning to JPY volatility, the story takes a different shape. Implied volatility is firming up, and the premium for JPY call options over puts is inching higher. This comes as USD/JPY climbs to new highs not seen since February, breaking above 155.00—a signal of growing intervention risks and the need for hedging.
Meanwhile, AUD/USD is finally catching up with the broader market dynamics. Declining stock and commodity prices are adding to related risks, pushing 1-month implied volatility up to 9.0 from 8.5 this week—a nearly 3-point premium over current 1-month realised volatility.
Overall, markets are likely to remain on edge in the near term. Shorter-dated implied volatility is expected to stay elevated as traders brace for Thursday’s delayed release of September U.S. jobs data. This report is seen as a key factor in shaping expectations ahead of the Federal Reserve’s policy decision on December 10.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!