Foreign exchange sales professionals are starting to push volatility trades, rather than directional plays, because they are predicting volatility will rise alongside interest rates and don't have a clear view on the dollar. Volatility is expected to increase over the next six- to nine-months because of the possible rate rise, said one strategist.
Volatility plays are also back in favor because the dollar's weakening seems to have slowed, at least for the moment, noted Marvin Barth, global foreign exchange economist at Citigroup in London. "Within the market, there is a dispersion of views that wasn't there before, for instance, last fall," he added. Structures such as straddles, which give exposure to volatility, are proving popular over longer dates, said one trader, who noted however that longer tenor trades are not common in this market.
In the short end, however, the activity remains concentrated on spot movements. Adrian Walkling, head of fx structuring at UBS in London, said range trades, which effectively sell volatility, are popular. For example, an investor pays USD1 today to receive USD5 in a month, providing the euro/dollar spot trades continuously in a USD1.16 to USD1.21 range.
