Foreign exchange players across the Street were selling short-dated U.S. dollar volatility last week, driving implied volatility levels to new lows. The move coincided will the depreciation of the greenback against the major currencies in the cash markets Thursday, on the back of softer-than-expected U.S. existing home sales data. "This is evidence economic growth is slowing and people are positioning for that," said one trading official.
One-month euro/U.S dollar implied volatility was at 7.7% Thursday, almost a full point lower than the five-year low of 8.58% recorded last week (DW, 8/21). "There have just been so many flows going through the market," said one London-based trader.
Traders said the most popular options were one-, two-, or three-month euro calls/ dollar puts with strikes around USD1.30, which is seen as a major tipping point for the pair. "People are always eyeing out that USD1.30 barrier," said a trader.
In spot, the cross was trading at USD1.2852 Thursday lunchtime. During trading in Asia overnight, the greenback had gained touching USD1.27. One week ago it was sitting at USD1.2869. Strategists are predicting further dollar strengthening in the short-term, in spite of Thursday's decline. "The break below the USD1.2770 key support area suggests a further pullback in the near-term targeting USD1.2695," noted strategists at BNP Paribas in London, adding, "A renewed attempt to recover is likely."
The dollar is also coming under pressure from event risks, noted strategists, such as the Federal Reserve symposium Friday at which Chairman Ben Bernake is expected to hint on the future of U.S. interest rates, as well as U.S. payrolls and the release of Fed minutes.
