The last two weeks have been characterized by rising stock markets and a generally better risk sentiment. In this respect, the market ignores a lot of negative signs and buys risk for lack of alternatives. At least that’s the impression. In this environment EURUSD implied Vols came down again. Tenors with vega exposure from 3m to 1y have dropped by 0.50% to 0.75%. Short-dated FX options have fallen even further by 1.50% to 2.00% compared to the last update.
(source: cme group, own representation)
I wrote in the last market commentary that the 7% mark is an important support for implied Vols and I’m sticking to it. There is currently no reason to assume that the market or the FX market in particular will fall back into the sleepiness of the 2010s. Inflation is getting a real world problem and central banks are so much behind the curve that their next steps will likely surprise to the upside. We just can't really imagine it yet. Even the argument that they can't raise at all (because of this and that..) no longer works at some point. Otherwise the bill will only get bigger.
In this respect 6m to 1y ATM Vols have reached interesting levels and protagonists with a longer time horizon (and real hedge exposure) could look for buy opportunities now. Nevertheless short term FX Options covering the next ECB meeting (april 14th) or the FED (may 4th) could also be interesting. As always I recommend only delta hedged positions if you are an active trader without any real exposure.
Have a nice weekend!
Sebbo