The USD has recovered from its month-end rebalancing flow-driven weakness, and liquidity returns after the U.S. holiday weekend. Focus now turns to impending data risks and central bank policy announcements in December.
U.S. ISM and monthly jobs data are supporting 1-week implied volatility. The 1-month contract is currently weighed by its post-Xmas holiday expiry date, but there has been demand for options expiring on and just after Dec. 19. They will include policy decisions from the U.S. and Japan, with uncertainty and volatility risk surrounding both.
The JPY could see the biggest reaction according to overnight expiry implied volatility estimates for Dec. 19, where USD/JPY at 32.0 (201 JPY pips) is priced to exceed FX volatility risk premiums for October and September BoJ meetings.
EUR/USD is back at 1.0500 on Monday, where another batch of big strike expiries and related hedging flows are aiding support. Last week's reduction in EUR/USD downside strike risk reversal premiums suggests that while the market isn't ruling out more EUR/USD weakness, it's not expecting another rapid and significant drop through the next batch of key option barrier levels from 1.0300.
Stand-out FX option strike expiries for the week ahead
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(Richard Pace is a Reuters market analyst. The views expressed are his own)
((Richard.Pace@Thomsonreuters.com))
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