In the last Market update on Friday we emphasized that implied Vol levels around 7% are still very low considering the geopolitical and economic situation. Finally we saw Vols exploding higher yesterday. The situation in the Ukraine-Russia conflict has become worse and it is now clear that uncertainty will not vanish soon with the ongoing Russian offensive. To put it cynically, one also gets the impression that the market has reacted more to the economic sanctions passed over the weekend than to the war itself.
The currency pair EURUSD is heavy offered since Monday morning and printed a new multi-year low at 1.1059 (bbg source) this european morning. This confirmed my guess from yesterday that we had not seen the bottom yet. As you can you see below short-term tenors are quoted very high now with double-digit Vols showing great demand for downside protection.
(source: cme group, own representation)
This could mean that the bottom in EURUSD has been reached for the time being. Protagonist holding short-dated Puts will probably lean against the big psychological 1.1000 treshold and delta hedge their position. Nevertheless, the Vol surface shows us, in particular the 3 mth tenor and above, that currencies are again subject to higher risk after years of central bank induced boredom.
So I don't think FX will calm down anytime soon and definitely do not recommend shorting (long-dated) Vol at these levels. In particular the Euro and currencies that are geopolitically close to Russia like the polish Złoty and the hungarian Forint are likely to remain under pressure for longer.
Good luck,
Sebbo