One-month euro/dollar implied volatility stayed rangebound last week despite a fall in spot and some strong comments from the European Central Bank. Last Wednesday implied vol stood at 11%, up only a fraction from 10.95% where it had traded the week before, while the euro fell to USD1.26 from USD1.27 against the dollar.
Although the euro rally appears to have stopped for now, its long-term strengthening against the greenback is expected to continue until it reaches USD1.30-USD1.35 over the coming months, according to traders.
The number of inter-governmental meetings, including the Group-of-Seven conference, coming up over the next few weeks makes it a good time to purchase options and many corporates, hedge funds and real money accounts have been rebuilding their books after the holiday season lull, noted the trader. A popular trade last week was to purchase euro calls/dollar puts with low strikes, such as USD1.25 or USD1.245 he noted. Demand for options at the front-end of the curve is likely to remain strong over the coming weeks, before petering out in early February, he predicted.
Andrew Chaveriat, foreign exchange analyst at BNP Paribas in New York, agreed that the euro's surge is likely to reach USD1.3-USD1.32. The currency will, however, meet resistance at around USD1.3 because barrier options have been sold at that level. This makes it unlikely that the currency will appreciate as far as USD1.35, he explained.
