Euro/dollar spot has been hitting record highs over the last week, yet implied volatility keeps falling. Implied volatility has fallen to 10.3% from 11% last week while the euro has jumped to USD1.22 from USD1.20. Traders expect to see it fall to 10% within a month.
Traders report that most of the trades are for short-dated contracts. This is because traders and investors are thinking about clearing their books for year end. A London-based professional said the fear of time decay is also playing its part, with traders wary of holding options over the holiday period.
Hedge funds have been the most active participants, but volumes have been light. This reflects the fact that the currency pair has settled in recent days.
Ian Stannard, currency strategist at BNP Paribas in London, said the reason for volatility decreasing even though the euro is appreciating is due to the relatively steady pace at which the euro has strengthened against the dollar. "The steady increase hasn't triggered a big rise in volatility," he said. "A lot of our models are suggesting we'll see a dollar rebound starting, and it's being led by dollar/Swiss [franc]."
EUR/USD Spot & One-Month Implied Volatility
