The euro plummeted to a two-year low against the U.S. dollar in the spot market last week, increasing already high demand for front-end downside euro/dollar options. The single currency dropped to USD1.176 last Tuesday from USD1.2066 Nov. 2, following the U.S. Federal Reserve's 12th consecutive interest-rate hike and news of higher earnings in the U.S. employment report. The euro's tumble sent implied volatility up to 9.40% from 8.87% a week earlier.
U.S. corporates were buying short-dated one-touch dollar calls, traders said. Expecting a further downside move in the euro/dollar, "people were buying downside one touches [at] every cent on the way down," at USD1.17, USD1.16 and USD1.15, one trader said. The play was connected to Homeland Investment Act flows according to officials. The HIA gave companies one year to pay 5.25% rather than the traditional 35% tax on foreign earnings and is set to expire at the end of the month. The combination of a strong dollar and the HIA prompted corporates to buy and repatriate dollars to pay down dollar-based debt. Traders said they see the trend continuing at least through the end of the month and into mid-December when the HIA expires.
