The fx options market remained quiet last week, in spite of sterling gains against the U.S. dollar wiping out the greenback's recent strength. Implied volatility remained subdued at 8% for one week, while one-month vol hovered around 8.3%. The spot spike saw cable reach USD1.77 last Thursday, up from USD1.75 at the start of the week.
"It just didn't set the world on fire," said one trader, talking about the anti-climax in options after sterling's climb in spot. Traders noted on the whole volumes were sluggish and most players seemed reluctant to commit to long-term views. Instead, short-dated options were reasonably popular, particularly one-week sterling calls with strikes between USD1.76 and USD1.78. Favorable low volatility levels made options buying more attractive, but still failed to trigger more substantial demand. One trader suggested the market is waiting to see if cable breaches USD1.78 which is regarded as a significant level, and once past that sterling may move beyond to USD1.80. Right now, we're stuck in a range, he added.
Tony Norfield, currency strategist at ABN AMRO in London, said sterling was buoyed by positive data and indications an interest-rate cut before Christmas was unlikely. At the same time, the dollar lost strength because of concern over pressures on the U.S. equity markets. "We could see a big spike in volatility if it went beyond USD1.78," he noted.