A crash in implied volatility across the major currency pairs was the focal point of a quiet week in European fx options. Traders said the plunge is the result of a sustained period of range-bound trading in spot and mixed views on whether there will be any significant moves in the coming weeks. "We have seen ridiculous lows," said one European trader.
One-year euro/U.S. dollar implied volatility dropped as low as 8.5% early in the week, which one trader said is the lowest figure since the introduction of the single currency. As DW went to press Thursday, volatility had risen to 8.8% on the back of deterioration in the dollar, which moved to USD1.2740 from USD1.2620 Wednesday.
The low volatility meant trading volumes were slight and this has been exacerbated by the lull in liquidity brought on by the European summer vacation period. One official noted some players were snapping up two-week euro calls, with strikes around USD1.2850 and others at one-month around USD1.29. On Thursday EUR/USD was trading around USD1.27. "There are not many people willing to strike above the USD1.30 barrier," he noted.
All market chatter now is on what will cause a big move in spot and kick up volatility, players said. Tim Fox, currency strategist at Dresdner Kleinwort in London, predicted the U.S. Federal Reserve's decision on rate hikes in August will be pivotal for short-term direction, noting a move above the psychological barrier of USD1.30 is not out of the question. "As speculation grows [as to whether] this will be the last rate hike, the dollar will become more vulnerable," he said.
