That was a roller coaster trading day around yesterdays CPI numbers (7.5% vs. 7.3% cons YoY) and in particular after Bullards hawkish comments that he could see a 100 basis points rate hike by july. In this enviroment of higher realized Volatility it is not surprising that implied Volatility is rising either. The market is realizing slowly but surely that central banks are going to reduce their accommodative monetary policy in the following months. And since yesterday it should finally be clear that more can be expexted from the FED compared to the ECB.
Nevertheless, no trading recommendations can be made from this knowledge. The direction of spot movements is subject to great uncertainties and it might make more sense to switch to FX Options at the moment. Of course, implied Vol is already higher now but loyal readers know I have been expecting higher Vol since December last year and that I am trying to give you Options based trading ideas on a more regular base on my Twitter. The most recent idea from the 27th of January for example should have printed good money:
As you can see above the (roughly) 1 mth ATM Vol was 6.17% whereas the CME Group (you’ll need a free login) quotes the 1 mth at 7.07% at time of writing. That increase looks already big especially as we remember years of low volatility and low prems which were actually paid by the loose central bank policy. If this policy really stops the price of buying protection will eventually increase.
(source: cme group, own representation)
Expect for the 1 week and 1 month tenor all ATM impl Vols are still below 7% and I think it’s still quite cheap in historical comparison. For example, in this CME Group article you can find historical data for the 1 month tenor from 2007 to 2021 inclusive to judge for yourself wether it is already high or not. And for the 6 months on a quick search I have at least found data for the period 2014 to 2019 in this older DailyFX-Tweet:
Implied Vols of 5% oder 6% are not set in stone and as you can see double-digit percentages are no problem at all when the market is starting to reevaluate future spot movements. In this respect, I am willing to buy FX Options even at higher levels.
Good luck,
Sebbo