One-month euro/dollar implied volatility spiked to 11.17% last Wednesday, up from 9.8% the week before, as the greenback continued its slide against the single currency in the spot market. Spot traded at USD1.189 on Wednesday, compared with USD1.15 seven days previous, according to a trader. The move was largely attributed to a Bush administration statement on Tuesday saying that the U.S. would impose import quotas on some Chinese textiles, he noted.
Volatility on the currency pair shot up as speculators rushed to purchase euro calls/dollar puts with high strikes, said the trader. With the euro having broken a several-month high against the dollar, most expect the trend to continue, he added. The next resistance level stands at USD1.2, he said, noting there has also been strong demand for euro calls struck at USD1.25. It would not be a surprise to see the euro strengthen as high as USD1.24 in the short term, he concluded.
Jim Kamphoefner, foreign exchange options strategist at Bank of America in San Francisco, agreed that the euro may move as high as USD1.24-USD1.26 by year-end. Over the past week there has been strong demand for all types of options, including short-dated euro call knockouts with strikes as low as USD1.22, he noted. Many of these are cheap and offer great leverage, however they risk being knocked out as the euro may strengthen quicker than expected, he predicted.
