Volatility – here to stay?
Prior to Trump’s liberation day, there were clear dates in the calendar that presented risk. Clusters of options expiries were therefore able to reflect the risks implied to markets from such dates. With no liberation day in the calendar and no roadmap for the resolution of existing tariff clauses (notably between the US and China), a definitive risk horizon is missing. Markets now find themselves in a more challenging situation where, by default, all expiries and durations must convey a discount on risk exposed assets.
You might think therefore that risk and implied volatility has increased since the shock provided by Trump’s liberation day. Well, according to implied volatility within FX options contracts, that risk is falling across all expiries. A glance also at the VIX paints a picture of declining volatility and perceived risk. Often referred to as the ‘fear index’, the VIX tracks implied volatility amongst equities, specifically the S&P 500. Having peaked at over 40, a significant level at least as far as the index’s own price history is concerned, today it trades at around 50% of this level across its curve.
It is true that implied volatility has moderated and we are seeing that cluster of risk dispersed throughout the calendar rather than around one date. Between the one week expiry and 1 year expiry, implied volatility declines from 10% to approximately 8.5%. With risk more evenly dispersed, it is certain that as the tariff agenda roadmap becomes clearer that pricing clusters will appear once again. As they do, there will be fall outs in FX spot and forward pricing particularly within the Dollar. Market sentiment will in the short run be heavily influenced by the success (or lack thereof) of Bessent’s trade negotiations.
Discussion and Analysis by Charles Porter
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