The foreign exchange options market was driven last week by players looking to punt on U.S. data publication in an otherwise quiet market. Traders were buying puts and calls on the euro/dollar currency pair in particular, boosted by historically low implied volatility. Although it crept up to 10% on Thursday as DW went to press, one-month implied vol was around 9.8% at the beginning of the week. Euro/dollar spot continued to trade in a range between USD1.203 and USD1.208, however, a reaction to Wednesday's non-manufacturing sector data saw the dollar drop initially to USD1.19 before strengthening to USD1.205 by the end of the day.
U.S. payroll data was due on Friday, after DW went to press, and the Federal Open Market Committee meets on Aug. 10. The majority of trades were short-dated, said traders, who noted a general trend to go long options. A popular strategy was to purchase one-month euro puts struck at USD1.22 or USD1.23, with knockouts on the downside at USD1.18 or USD1.17.
Tony Norfield, currency strategist at ABN AMRO in London, said, "This coming week could be quite decisive in determining whether euro/dollar will break out of its range." Norfield said the beginnings of a rise in volatility this week could be an indication that euro/dollar spot will move lower, out of the range.
