Implied volatility for euro/dollar options rose sharply last Tuesday after a yard of three-month risk reversals and around USD600 of euro calls went through the market. One-month implied vol rose to 11.65% Tuesday from 10.9% the previous Friday. Traders said the euro calls/dollar puts had strikes of USD1.2250, when spot was trading at USD1.19. The three-month risk reversal trades pushed the risk reversal to 1.05 vol in favor of euro calls. By Wednesday, however, traders said that most of the speculation had been done and by Thursday the risk reversal was trading at 0.85 vol and one-month implied vol had fallen to 10.65%.
Deutsche Bank continues to be bullish on the euro, with a six-month target of USD1.22, according to Trevor Dinmore, foreign exchange strategist in London. He explained that there is a risk that the surge in the euro will result in some investors taking profits on euro positions, however, real money accounts in Europe have not overbought the euro, so if there are dips in the spot level, these accounts may buy more.
Dinmore attributes the recent fall in the dollar against the euro to capital flows out of the U.S. "The U.S. has seen a tapering of inflow into agency debt, corporate debt and equities without adjustment on its trade deficit," he added. Dinmore said that it is not a case of capital flow into Europe, it is more that it is no longer suffering from the hemorrhaging of assets.
EUR/USD Spot & One-Month Implied Volatility
