Market players were lapping up short-dated sterling puts last week as the currency fell to an eight-month low against the U.S. dollar and the market reacted to poor U.K. economic data. On Thursday, sterling dropped to USD1.790 from USD1.817 the week before. One-month implied volatility jumped to 7.9% on Thursday from 7.25% on Monday.
Users were buying one-day to one-month sterling puts with strikes between USD1.75 and USD1.79 when spot was at USD1.80. "People have done well already," said one trader, adding, "We have seen continuity in fx expectations of a downturn in the U.K. market." Another official said these expectations were strictly a short-term view. "People aren't buying six-month and one-year trades because they don't think this is a complete change in fortune," he said.
Currency analysts said the popularity of sterling puts was a reaction to U.K. economic figures being revised downward. These included a reduction in forecast gross domestic product, the widening of the current account deficit, a fall in house prices and a Confederation of British Industry survey showing retail sales falling at their sharpest pace in at least 22 years. One strategist noted players were also readying for the Bank of England to bring forward an interest rate cut, as well as increasing the size of the cut, which would cause sterling to fall further against the dollar.
"This is clearly a sterling-driven view," said Steven Saywell, chief currency strategist at Citigroup in London. "The dollar is not getting stronger, sterling is getting weaker," he said, adding, "It's getting weaker against any currency you care to name."
