Traders scrambled to buy short-term, downside New Zealand dollar and Australian dollar puts against the greenback last week as spot swooned and volatilities popped. New York traders said U.S. interest rate uncertainty, weak bond markets and a general liquidation of carry trades contributed to a flight to quality, with traders buying downside puts, playing calendar spreads and unwinding high-interest rate currency positions into low-interest rate currencies.
One bank was reported to have bought a series of USD600 million eight-day low-strike Aussie puts out to April 30. Another prominent trade involved banks buying front-end--typically out to one-month-downside options and selling back-end, typically two-month upside options. "Everyone that was short gamma needed to buy back options to stop the bleeding," said one New York trader, noting the focus was on the front end and people were paying premiums for shorter-dated options.
The U.S. dollar advanced steadily in the spot market and implied volatility spiked as people unwound positions. The Kiwi dollar fell to USD0.6257 spot Wednesday from USD0.6448 March 15 and the Aussie dollar dropped to USD0.7192 Wednesday from USD0.7382 over the same period. One-week USD/NZD implied vol spiked to 13.22% Wednesday from 10.52% March 15 and one-week USD/AUD implied vol jumped to 9.65% Wednesday from 7.31% March 16. One-month USD/NZD implied vol rose to 11.65% Wednesday from 10.36% March 15, while one-month USD/AUD implied vol climbed to 8.90% from 7.50% March 16.
"I think [the buying activity] has to settle in," said one trader. "It seems a little mad at this point."
