A pickup in the U.S. dollar against the euro last week prompted a euro put-buying rush from exposed corporates. The dollar reached USD1.2768 against the euro Thursday, from USD1.2931 the Friday before, while one-month implied volatility slid slightly to 8.78%, from 8.8% the previous Friday. Low implied volatilities, considering the move in spot, also encouraged downside euro options buying.
Corporates were focusing on longer dates, out to three months, said traders, with strikes at the bottom of the range EUR/USD has been trading in, around USD1.26 and USD1.27. A trader described the buying as opportunistic, coming mostly from corporates who part-hedged euro/dollar exposures at the start of the year, now hedging the rest of their risk at better levels.
Although a big chunk of euro puts was placed Tuesday, noted one trader in Chicago, option sellers have outweighed the buyers. Hedge funds and prop desks were mostly selling options. "It's caught a lot of people off guard," said one trader of the rise in the dollar. "People who were long have been dumping options."
Euro/dollar implied volatilities are closely connected to moves in spot, noted another trader, who added he expects the dollar's gains to reverse in the next few months and implied volatilities to pick up again. Ian Stannard, strategist at BNP Paribas in London, agreed in the near-term the dollar is likely to see more support but cautioned that in the medium term--out to the end of the year--the dollar may be further undermined. Hawkish rates comments from the Federal Reserve are ratcheting up the dollar now, he explained, but in the longer term weak data could still damage the currency.
