Euro/dollar traders were preparing for a big jump in implied volatility last week, as the currency pair reached USD1.2315 in the spot market, close to knocking out significant options barriers at USD1.24. Despite the spot market move, one-month implied volatility was close to all-year lows at 8.4%. Low option prices as a result of low vol failed to encourage activity in the market. "Hedge funds do not have the intestinal fortitude to put on big positions right now," said one trader, who explained fx funds have had a difficult year.
Other traders, however, believed it was only a matter of time before low volatility would prove too tempting for funds. "Options are so cheap at the moment," said one trader. "[Funds] that are carrying short vol positions will be coming in to buy up options, but this hasn't happened yet," he added. Although there was limited demand for short-dated options, traders noted market players looking to buy euro calls for the first week in November at a range of strikes over the U.S. election. To finance these options, players were selling one-month at-the-money euro calls.
Ian Stannard, currency strategist at BNP Paribas in London, noted the fx market is currently being driven by oil prices and falling bond yields. "If oil prices stay high for a few days, that could trigger a [euro] move higher," he said. Stannard noted the recent high for the euro was USD1.2345, so if this is breached it will likely trigger a bigger move for the euro.
