The foreign exchange options market was taken by surprise last week after the U.S. dollar gains against the euro triggered demand for options. The single currency fell to USD1.318 against the dollar Thursday, compared to USD1.363 the previous Friday. The dollar's appreciation was unexpected and traders reported speculative players cutting their short dollar positions. In spite of the spot move, the rise in one-month implied volatility to 10.4% last Tuesday from 10% on Monday was small. Traders noted the good liquidity in one-month euro dollar options means the implied volatility of the currency pair is less affected by moves in spot than some other currency pairs.
Interbank and speculative traders were the most active players last week, according to one trader at a German bank. There was demand for dollar calls at a range of strikes out to one month, he added. All eyes were on Friday's payroll data to give an indication of the market's direction. "It would take a brave man to make a call on the market before payrolls," noted one trader. He explained players were looking to gain gamma exposure rather than take positions on the dollar.
Tony Norfield, currency strategist at ABN AMRO in London, said, "We think there's not much more downside left for the euro." The fact that speculative players have cut their short dollar positions means there is less easy upside for the dollar, added Norfield, who predicts the dollar will continue weakening in the long term.
