One-month implied volatility on euro/dollar options worked its way back to last week's level of 9.9% Wednesday, having dipped as low as 9.45% on July 18. The end-of-week drop in volatility was largely influenced by a wind down leading into the weekend with options players not wanting to hold long-dated options, according to one trader.
Comments by Federal Reserve board governor Ben Bernanke last Wednesday suggested a weaker recovery than had previously been stated, which sparked a dip in the value of the dollar against the single currency and a corresponding hike in option volatility. The euro/dollar traded at USD1.14, up from USD1.11 the Wednesday before.
Much of the selling was through short-dated contracts with players selling dollar calls/euro puts and buying euro calls/dollar puts with knock outs of USD1.17-1.20, said the trader. For now the euro seems overextended and susceptible to correction although the dollar is likely to weaken to USD1.20 by year end, he predicted.
T.J. Marta, foreign exchange strategist at Citigroup Global Markets in New York, disagreed, saying that the dollar will show strong resistance at USD1.15 and will strengthen going into year-end to stand at USD1.07 by the beginning of next year. U.S. yields are up and the euro rally seems anomalous and is likely to have been caused by position squaring, he suggested.
EUR/USD Spot & One-Month Implied Volatility
