Demand for short-dated euro puts dominated fx trading last week, fueled by players speculating on European interest rate cuts and a subsequent euro decline against the U.S. dollar. In the spot market, the euro depreciated against the greenback to USD1.2136 Tuesday from USD1.2232 the Friday before. One-month implied volatility fell to 9.05% from 9.38%, having little place to go but down after a spike in vol the week before (DW, 6/20).
Traders snapped up one-month euro puts with a USD1.20 strike after Sweden cut interest rates Tuesday by 50 basis points to 1.5%--making copycat actions by other European central banks look more likely, one trader said. The trader called the USD1.20 mark a significant barrier level, explaining a lot of one-touch options and knockouts strike there. This means there will be a lot of volatility in the spot market if the euro/dollar continues to edge down, with some traders pushing to break lower and others trying to keep the currency pair above the mark.
Besides Sweden's rate cut, minutes from a Bank of England meeting revealed two of nine policy makers voted for a rate cut this month. And some players say a European Central Bank rate cut is just a matter of time. Not only is there a lot of speculation about rate cuts, said Naomi Fink, a senior currency analyst with BNP Paribas in New York, "[But] there still remains a significant amount of political risk." She pointed to uncertainty over Italy's fiscal policy and the German confidence vote in July, which could cause the euro to weaken further versus the dollar.
