Market players were snapping up euro puts last week as the currency deteriorated sharply against the U.S. dollar and investors positioned for further slippage. On Monday, the euro dropped to USD1.2035 from USD1.2268 the week before, while one-month implied volatility on euro puts rose from 8.9% at close on June 10 to 9.2% on Wednesday.
Traders said investors across the board were buying one-year euro puts with strikes between USD1 and USD1.15. "They are going for anything on the down side," one trader noted. Players were also buying shorter dated one-month puts, with strikes around USD1.18, sparked by the euro hitting the significant barrier of USD1.20, one official explained.
Steven Saywell, chief currency strategist at Citigroup in London, said the fall in euro/dollar was in line with the short-term forecasts of many derivatives houses, including his own. Investors, however, were unsettled because the slide was so aggressive, he added. "People turned to options and euro puts because they wanted protection against the downward trend if it keeps going," he said. Saywell predicted the euro would consolidate and fall no lower than USD1.20. One trader, who held a similar view, said the market was overreacting to the fall in the single currency and "the preoccupation with euro bearishness is overwhelming."
Euro bearishness is being driven by uncertainty engulfing the European Union's regulations and budget, explained Ian Stannard, currency strategist at BNP Paribas in London, adding news from the E.U. Summit, held on Friday in Brussles as DW went to press, would act as a trigger. "If the E.U. states are unable to come to an agreement about the budget, the euro will be further pressurized," he said.