Short-dated euro puts and U.S. dollar calls were in demand last week, in anticipation of a French rejection of the E.U. constitution in Sunday's referendum. In spot, the euro was already swooning against the greenback, falling to USD1.2583 last Tuesday from USD1.2633 the week before. One-month implied volatility fell to 8.26% from 8.47% as selling of vol exceeded buying.
Players were also looking to profit from an expected uptick in volatility over the referendum weekend. Some were selling Friday euro volatility and buying Monday vol, in a French referendum spread trade, according to Steve Bruner, fx analyst with JPMorgan in New York. One trader added players were selling volatility across the curve, from one-month out to one-year. "The whole curve has been heavy," he noted.
Andrew Chaveriat, fx analyst at BNP Paribas in New York, said the market has already priced in a French rejection of the constitution. "After the vote, we could get an opportunistic rebound of the euro," he said.
Still, analysts said other factors are driving the euro lower against the greenback, such as a report issued last week that business confidence in Germany, the E.U.'s largest economy, dropped for a fourth straight month. Traders prefer going long dollars, they added, because U.S. data has been favorable this month, signaling an improving U.S. economy and strengthening dollar.