FX Volatility

EUR/USD implied vol should decline to 5.00-5.50% as ECB-Fed rate convergence reduces uncertainty. Sell EUR/USD straddles and fund directional EUR calls. The narrowing rate differential reduces the primary vol driver.

With G10 FX vol expected to remain subdued, carry strategies should outperform. AUD and NZD carry-to-vol ratios are particularly attractive. Use options to harvest carry in a low vol environment.

NOK and SEK implied vols remain elevated relative to realized vol, creating selling opportunities. EUR/NOK vol at 8.5% looks rich given the grinding downtrend we expect. Sell EUR/NOK and EUR/SEK vol.

EM FX vol should remain suppressed in 2026 absent a major risk event. Brazil elections in Q4 will add some event premium to BRL vol, but overall EM vol profile is benign. Favor selling vol in MXN, PLN.

USD/JPY vol remains elevated relative to other G10 pairs due to BoJ uncertainty. Use JPY vol as a portfolio hedge. Buy USD/JPY puts for directional bearish exposure at reasonable vol levels.

AUD/USD implied vol looks cheap relative to the magnitude of move we expect (0.64 to 0.73). Buy AUD/USD calls outright or via call spreads to capture the vol discount and directional upside.