FX options traders pulled back on short-dated euro/U.S. dollar option positions Thursday, after the European Central Bank surprised the market with a pause in its interest-rate tightening. Earlier in the week, the cross breached USD1.22 for the first time since January and the euro moved up to USD1.23 Wednesday--the highest level of the year--from USD1.20 March 29. "This is the most significant spot move of the year," one trader said Wednesday. One-week implied volatility, which moved with spot, spiked to 9.33% Wednesday from 7.19% last week.
Earlier in the week, players had been buying one-week to one-month euro calls with strikes at USD1.25. Thursday, they were buying one-month to three-month euro calls and risk reversals with strikes at USD1.27. One player--likely a macro-hedge fund taking a medium-term view on euro strengthening--bought a three-month EUR500 25 delta Euro call at USD1.27. "People want to buy Euro calls because they are expecting spot to go up over the next few months," one trader said.
Traders and strategists viewed the development as a pause, rather than a reversal of the weak dollar trend. "We're seeing position trimming after the ECB meeting and ahead of payrolls," said Greg Anderson, director of FX strategy at ABN AMRO in Chicago. "But this is not an end to the euro/dollar trend. It is a pullback that is long overdue." Anderson predicts the ECB will raise rates in May, the Federal Reserve will indicate an end to its hikes, U.S. trade numbers will come in low and the U.S-China trade talks later this month will send the dollar lower.
