The U.S. dollar gained in the spot market last week driving players to snap up options on dollar crosses to capture short-term volatility. Positive manufacturing and employment data releases Wednesday were responsible for the spot move and with non-farm payrolls due Friday, fx investors were looking to pick up gains from further volatility, traders reported.
One-week implied volatility on EUR/USD was at 7.75% at close of trading Wednesday, compared with 7% going into the holiday period. In the spot market, the pair was at USD1.3170 late Wednesday, up around a cent on the previous week.
Although trading volumes were low, traders reported interest in short-dated at-the-money buying from those investors that weren't on vacation. One-week dollar calls and puts were equally bid and cable as well as euro/dollar was a popular cross. The dollar jumped to USD1.95 against sterling Wednesday, up from USD1.97 the previous week. Options expiring Friday, to cover the non-farm payroll release, were also popular.
"People do not want to trade a particular direction," noted one trader in New York. He said there was a New Year feel to the market, meaning trend-following investors have not yet decided where to go. "I think that it's a typical start of the year," agreed another trader. "People were grabbing on to any kind of news."
Ian Stannard, currency strategist at BNP Paribas in London, said the dollar's pullback could continue given some evidence of technical support for the rally in the market. Against sterling, he said it could reach USD1.9280 in the short term but warned non-farm payrolls could reverse this trend. "We believe there's potential for a negative shock and will be looking for a potential rebound on a weak non-farm payroll," he added.
