Hedge funds betting against the U.S. dollar were buying short-dated downside euro/dollar and dollar/yen puts ahead of the release of a series of economic indicators last week. "It's been very quiet because of the [U.S.] holiday, the [soccer] World Cup and general summer doldrums," said one New York trader. "But we're slowly starting to see interest pop."
The run up to European Central Bank and Bank of Japan interest-rate news last Thursday and this Tuesday, respectively, saw players position for rate rises that would prompt dollar weakening. The expectation last Friday's U.S. non-farm payrolls would come in weak also prompted players to bet against the dollar as DW went to press Thursday. In the spot market, EUR/USD was trading at USD1.273 and USD/JPY at JPY115.70 from roughly the same a week earlier, and players were buying one-week and under EUR/USD puts with strikes around USD1.28 and USD/JPY puts with strikes ranging from JPY115 to JPY114.
"Downside dollar bets have been stomped out multiple times," commented Greg Anderson, fx strategist at ABN AMRO in Chicago. "But in general the market still has them on." One-month implied volatility was about 8.25% for EUR/USD and 8.85% for JPY, unchanged from a week earlier.
The other currency pair under the spotlight was USD/MXN, which moved dramatically last week following Sunday's unresolved presidential election. Spot was MXN11.22 midday Wednesday, but bounced between MXN11.51 and MXN11.05, while one-week implied vol spiked to 17.25% from 10% a week earlier. As a result of the volatility, options market liquidity completely dried up. "You're lucky if you have the right position and unlucky if you have the wrong position and you're just stuck with it," said one trader.
