FX speculators were selling short-dated options last week to position for a quiet coming week. Traders said most activity in Europe was on euro/U.S. dollar, which saw a significant spot move the previous week but calmed down at the start of last week to settle at USD1.26. Implied volatility was at 7.6% last Friday, compared to 8.2% the previous week.
Hedge funds were selling at-the-money overnight and one-week options, including straddles, according to traders. No one, however, was prepared to sell beyond one week, due to reports hedge funds hit by losses linked to downgrades of General Motors Corp. and Ford Motor Co. (DW, 5/9) would have to unwind fx positions to meet margin calls. "That could bring some volatility back to the market," noted one trader. He said dealers and other funds are trying to second-guess what those positions might be. "It's not clear if they are long or short the dollar," he added. However, one other trader noted some long euro positions were sold the previous week, contributing to the single currency's slide against the dollar. He suggested this could be linked to the hedge fund turmoil.
Tony Norfield, currency strategist at ABN AMRO in London, said, the market has not yet made up its mind whether the dollar is trading at the top of its range, or whether it will it break through barriers at USD1.23. "It's an environment ripe for rumors about hedge funds closing out positions," he noted.
