The U.S. dollar's sharp decline against the euro over the U.S. Thanksgiving holiday prompted strong demand for options. Implied volatility rocketed across the curve, with the largest increase being at one year, where implied volatility shot up to a high of 7.9% last Tuesday from near decade-long lows at 6.9% before the holiday. It came off somewhat later in the week, as liquidity and options players returned to the market after the holiday. Over the same period, spot moved from USD1.28 Wednesday two weeks ago to USD1.31 last Wednesday.
Traders reported options buying as players looked to gain from rising volatility. In the aftermath of the Thanksgiving move in spot, there was a rush to buy EUR/USD at-the-money options. "It was panic buying," said one trader in New York. There was a sizeable bias toward the euro upside, with players buying euro calls and selling euro puts driving one-year 25-delta risk reversals to 0.65 volatility points from 0.2 vol points. Later last week, however, houses reported seeing interest in exotic options such as one-month one-touches with barriers at USD1.33 or even USD1.35. The return of liquidity also encouraged U.S. corporates with euro assets to sell this interest into the market. "We've started to see a lot of corporate hedging going on," he added.
Rebecca Patterson, senior currency strategist at JPMorgan in New York, said, "The euro is likely to remain well supported into the European Central Bank meeting [Thursday]." Patterson said both the ECB and the U.S. treasury would likely verbally intervene if the U.S. dollar slumps much further or if implied volatility rises sharply. "I do not think there is much more upside for volatility," she added.
