FXO Market Update - Mar 22 FXO Market Update - Mar 22 FXO Market Update - Mar 22

FXO Market Update - Mar 22

Summary:  Market has turned focus back to inflation and rates and USD trades higher. USDJPY has taken out the 120.00 level and is up form 115.00 in about 2 weeks. Vol trades bid despite realized not performing with 1 month USDJPY currently at 7.5 vol and realized vol at 6.0. Market positioning keeps risk reversals bid for puts even if spot is up 4% in 2 weeks.

Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
Source: Bloomberg, Blue: USDJPY spot, Black: USDJPY 1 month vol, Red: USDJPY risk premium

Vols have traded lower in EUR and CEE3 over the last week after peaking two week ago when EURUSD 1 month traded as high as 12.60. 1 month is now back to 8.50 compared to 7.50 before Russia invaded Ukraine.

Market have started to turn focus back to inflation and rates and we have seen US rates and the USD trade higher with the last push higher yesterday after hawkish comments from Powell.

USDJPY continues to trade higher with US rates higher and spot has taken out the 120.00 level, spot now trades at the highest level since the start of 2016. Hearing from the street, the 120.00 was a rather large barrier level and now when that is taken out market is short vol to the downside, from vanilla hedges done against the barrier options. At the same time market is long vol at these spot levels and higher. So even if spot has moved up from 115 to 120 in a short time the market positioning makes the risk reversal still trade bid for the downside, 1 month 0.25 for puts, as the market needs to buy back downside strikes while they are long options at current spot levels. This also means that any vol rallies when spot trades higher most likely will be short lived as the market has long options to the topside in the inventory they like to sell. Lastly even if spot is marching higher the realized vol is still trading around 6 vol while implied currently trades at 7.5, giving a risk premium of 1.5 vol which is the highest in G10. With this in mind we prefer to run short vol strategies like covered calls or risk reversals where we buy calls and sell puts to take advantage of the risk reversal that is bid for puts.

Sell 1 week 121.50 USDJPY (covered) call
Receive 20 pips


Buy 1 month 121.25 USDJPY call in 1 mio
Sell 1 month 118.75 USDJPY put in 2 mio
Zero cost

Spot ref.: 120.65

We like to play the covered call strategy by selling shorter dated options so we can re-sell and adjust the strike after each expiry. We prefer to do the risk reversal in one by two ratio to take advantage of both the high vol and the risk reversal
Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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