Short-dated implied volatility on the U.S. dollar/Mexican peso spiked last week as traders scooped up options to cover positions on emerging markets currencies. Players were unwinding high interest rate currency positions into dollar and other low interest rate currencies by buying short-term vol, traders said.
One-week USD/MXP implied volatility shot up from 6%--around which it traded until March 1--to 10% March 8 as DW went to press. One-month implied vol jumped from 6.5% to 8.2% over the same period. The dollar climbed to MXP10.78 in the spot market from MXP10.47. "That is far beyond historical levels and we saw a quasi-panic in the options market because of it." One player reportedly bought a large volume of one-month 20-delta Mexico puts at two levels--8.7% and 8.9%--with an average strike of MXP10.95 Tues. "It's all one-sided," said one trader. "Everyone's buying options on emerging markets."
New York traders said implied vol across emerging markets currencies rose last week on a combination of factors, including U.S. interest rate moves and speculation about the bank of Japan raising rates. "We're seeing a flight to quality into dollars from all emerging markets currencies," said one official. Traders noted they haven't seen the same eagerness to buy Brazilian real/ dollar volatility, where vol is higher but trading within normal range, compared with Mexico, where the change on a relative basis is greatest.
Most traders, noting that no one is buying one-year vol, said they see the spike as a blip and not a structural change.
