Some time has passed since the last market update (17jan), but the euro is trading almost at the same level. The Vol Surface, however, shows implied volatility between 0.25 and 0.75 points higher across all tenors and deltas. On the one hand, this once again confirms the picture that higher spot rates do not automatically lead to lower implied vols. On the other hand, the last few days have shown that the erratic risk sentiment and higher interest rates are here to stay.
Contrary to partial expectations that possible interest rate steps would not materialise, both the ECB and the FED have raised rates by 50 and 25 basis points respectively. At the same time, they have emphasised that the focus will remain on fighting inflation in the longer term. Lower interest rates are therefore not to be expected in the near future. And the low interest rate level was, after all, the cause of particularly low volatility.
(source: cme group, own representation)
The vol table above shows the quotes at 06:45 NY time. It is certainly noticeable that all ATM tenors and low delta calls are trading above 8%. In the medium term, this should not change much for the reasons mentioned above. In this respect, vol dips of 0.25 to 0.50 points should quickly generate buying interest. However, low delta call volatility could jump higher in the short term. The euro has reclaimed the 1.0800 level and the large 1.11/1.12 pivot zone is within reach again. The volatility surface already shows the increased interest in short-dated low delta calls:
(source: data from table, own representation)
Nevertheless, the fx options market sees the risk on the downside for the euro, in particular for maturities longer than one month. Dollar buyers with immediate hedging needs should, in my opinion, consider 25 delta puts with maturities of 2 to 6 months (depending on the underlying transaction and market expectations). The corresponding Vol curve is almost flat and still well below 10%. For active players, I tend to advise short-dated (2w to 2m) hedged 25 delta calls. Should the euro really go higher, one could even consider leaving the hedges at the top and outright shorting the euro.*
Good luck,
Sebbo
(*reminder: my content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances.)