The price of one-month euro/dollar options drifted down to 9.4% last Wednesday having traded at 9.6% the previous week while the greenback weakened to USD1.07 in the spot market, from USD1.05. The decline in vol counters traditional market movements, which see vols spike as the euro appreciates, noted a New York-based trader. One reason for the recent fall in vol lies in the slow pace of movements in the spot market. The presence of several large exotic options, which hold big stop losses at levels such as USD1.07 and USD1.08, has also served to stem any volatility increase, he added.
Much of the activity over the past week has been driven by players putting on out-of-the-money short-term trades with no directional activity. Hedge funds and bank proprietary desks have been the most active players, said the trader. Traders are predicting the euro is likely to jump to USD1.08 in the next fortnight, with vol on the currency pair likely to remain unchanged.
Robert Lynch, currency strategist at BNP Paribas in New York, said the single European currency has been rising against the dollar at a rate of approximately one cent a week since the beginning of December, and USD1.08 is right at the top of the currency's upchannel. Movements in the currency pair have been predicated on dollar selling, more than on optimism on the euro, with increased anticipation of a war in Iraq also working against the greenback, he noted. The current pace of euro/dollar gains is unsustainable, with a correction due soon, predicted Lynch.
EUR/USD Spot & One-Month Implied Volatility
