Players were buying short-dated euro/U.S. dollar and sterling/ dollar calls last week as the greenback took a beating in the spot market. Strong European data contributed to expectations of continued dollar weakness. Euro/dollar spot spiked to USD1.2630 last Thursday--a one-year high--from USD1.23 April 20, while cable hit an eight-month high of USD1.8430 last Thursday.
Spot activity also sent implied volatilities higher, with both pairs popping to their highest one-month levels since February. Euro/dollar implied vol rose to 8.7% last Thursday from 8.17% a week earlier and cable to 8.1% Thursday from 7%. "Volatility is picking up from all-time lows in March, with the dollar testing new lows on the year," said one trader. "The general theme is that there is more life in everything than in the past."
New York traders said one- to three-month options were most common, playing euro/dollar upside. Euro calls with strikes at USD1.27 to USD1.30 were most common. "[Foreign] central banks are shifting into Euros," explained one euro/dollar options trader. "Speculators are trying to jump on the shift in reserve allocations.
For cable, at-the-money calls striking at USD1.83 to USD1.85 were in favor. Traders and strategists said, however, sterling is unlikely to break the next resistance level of USD1.85, but shows no indications of near-term reversal either. "Sterling is looking toppish," said Bob Lynch, senior fx strategist at HSBC in New York, noting the firm's long-term forecast is for cable to come back down to USD1.76 by year end. HSBC last week revised its forecast for euro/dollar to reach USD1.30 by year-end, rather than the middle of next year.
