The foreign exchange options market focused last week on non-farm payroll data due to be released after DW went to press on Friday, which caused overnight implied volatility on the euro/dollar currency pair to rise to 20% on Thursday from its usual 10%-13% level. Overnight implied volatility also jumped to 16% on the dollar/yen pairing. In the spot market the dollar fell slightly against the yen to JPY109.47 on Thursday from JPY109.55 the week before and the euro strengthened against the dollar to reach USD1.21 compared to USD1.20 a week earlier.
Traders reported some demand for overnight at-the-money call options on both the yen and euro in the midst of a quiet market. Foreign exchange players seemed unwilling to punt on the data, said traders. "People are buying protection against a move in either direction," said a trader at a German bank. "The market is extremely uncertain," he added. "The market is all about the overnight options, but [fx market participants are] all too cheap to pull the trigger," said another trader, who explained everyone was hoping to see an end to the range-bound trading across the fx market in the last few months.
One strategy last week that involved some direction-taking was to buy at-the-money one-week yen call options with a reverse knock-out at JPY107.50. Traders explained the knock-out made the option cheaper and traders felt JPY107.50 was a good knock-out because the yen is not expected to move below JPY108 against the dollar.
Tony Norfield, currency strategist at ABN AMRO in London, said players were unwilling to enter directional trades because of the shock following last month's payroll data, when the U.S. dollar initially moved several points against both the yen and the euro.
