One-week euro/dollar volatility jumped to 8.75% in afternoon trading Wednesday from 8.3% earlier in the day, according to London-based traders. Some said vol rose as traders bought euro puts/dollar calls to hedge options they had sold to Morgan Stanley and Goldman Sachs the week before. Two weeks ago the two bulge bracket U.S. firms had bought over a yard of euro puts/dollar calls with USD0.90 strikes in a three hour feeding frenzy (DW, 5/13).
The traders bought the options as the euro depreciated to USD0.9034 from above USD0.91 earlier in the week. The market was short the options and got frightened as the euro dived. The euro puts expired out of the money. However, not all traders agreed the hedging pushed up vol. One said, "Vols are more a function of spot [right now]." The dollar was weakening against the euro because the U.S. industrial production number was revised downward and the U.S. stock market opened lower, they said.
Andrew Chaveriat, v.p. and a fx technical analyst at BNP Paribas, in New York, said it is hard to tell if the euro/dollar spot level will break out of the USD0.90-0.92 range. "Last week we made a sharp rally, when Tuesday it reached USD0.91, and then it pulled back a bit off the USD0.919 level."