Implied volatility on the Aussie/U.S. dollar currency pair spiked last week after Alan Greenspan presented to the U.S. House of Representatives a rosier than expected picture of the U.S. economic recovery. One-month implied volatility on the pair jumped to 12.8% last Wednesday, up from 12.1% before the testimony, according to a New York-based trader. The greenback strengthened to USD0.70 from USD0.72 before the statement. Greenspan's comments were influential because they solidified the likelihood of an interest-rate hike next month.
The testimony of the Federal Reserve chairman sent fx players with shorts on the greenback scrambling to buy dollars and cover the positions, said the trader. Demand in the inter-dealer market to buy gamma was also strong, particularly in short-dated maturities such as overnight, one week and one-month options, he added. The greenback's rally is expected to be short-lived, however, with the Aussie currency likely to retrace back to USD0.72, he predicted.
Larry Brickman, currency and interest-rate strategist at Bank of America in New York, agreed that the greenback would lose some of its strength in the short-term, however, he projected that in three months it will retrace to trade back at USD0.70 and appreciate further to USD0.67 over six months. While the market has already priced in August's predicted interest-rate hike in the U.S, further tightening by the Fed will work in favor of the greenback, Brickman said.
