Volatility selling dominated fx trading last week, in the run up to the Easter holiday. The trend was attributed to a combination of the usual holiday fear of time decay, coupled with an interest in taking profit on U.S. dollar crosses. This strategy was prompted after the dollar gained against other currencies in response to better-than-expected trade-balance figures. The euro fell to USD1.2109 Wednesday, against USD1.2128 Tuesday before the release of the figures, but implied volatility stayed low under the holiday selling pressure. One-month implied volatility was at 7.69% last Wednesday, down from 8.37% the previous Wednesday, and it also came off about a vol point on other crosses.
Traders reported selling of strangles, typically 25 delta, to play a further drop off in vol over the holiday, while betting the EUR/USD will stay range-bound and close to the USD1.21 mark. Profit taking was also evident on New Zealand dollar crosses, as the tide of opinion started to view the kiwi's drawdown as over done. Hedge funds that had bought Kiwi/greenback puts at around USD0.69 over the last few months, to profit from emerging market-linked weakness, started closing out those positions, reported one trader in London. The Kiwi was trading at USD0.62 in the spot market Thursday as DW went to press.
Ian Stannard, currency strategist at BNP Paribas in London, noted funds should beware of over playing EUR/USD low volatility. The U.S. returns to work Monday, he noted, and data releases that day may have a negative impact for the dollar, sending the pair back to the top of its range at around USD1.23. "There are quite a few risks on the horizon for the dollar," he cautioned.
