Hedge funds are jumping into exotic option positions to take exposure to a fall in the euro against the dollar, prior to the release of U.S. payroll data on May 8. Gilles Bransbourg, head of European foreign exchange sales at Bear Stearns in London, said a popular trade is to buy at-the-money euro puts/dollar calls with a reverse knock-out struck at USD1.1450, expiring on May 7 before the release of the data. These options cost around 32 basis points, but the equivalent vanilla option is more expensive at around 88bps. Last Wednesday, euro/U.S. dollar spot was at USD1.18 and traders predicted that the probability of reaching the USD1.1450 barrier is limited.
Strong payroll figures released at the beginning of this month made investors more bullish on the greenback and prompted a rally, said Tony Norfield, currency strategist at ABN AMRO in London. Next month's data will confirm whether or not this is a trend, he added.
