Euro/dollar one-month implied volatility hit its lowest level in three years last week as a range-bound spot led to a continued decline in demand for options. One-month vol fell to 8.05% by Thursday from 8.75% at the start of the week, this is its lowest level since February 1999. Implied vol was roughly 10% at the start of the month. "The market's been really slow and range-bound, it's not giving any signals which way it will break," noted one options trader. Although activity was generally scattered, he said there was a sizable interest from clients buying longer-dated euro calls/dollar puts with strikes between USD0.88-USD0.92. Spot was USD0.87 Thursday. "We've seen a lot of clients covering their long dollar positions by buying euro calls for hedging" one trader said.
Ian Stannard, a foreign exchange strategist at BNP Paribas in London, said the euro gained momentum during the week on U.S. accounting and credit fears but the common currency was unable to break through the USD0.88 barrier. Fourth-quarter German gross domestic product statistics are revealed this week and he expects them to be in the red. That, combined with last Wednesday's surge in the Dow Jones Industrial Average, could spell trouble for the euro. "The dollar has had a bit of a wobble, but Germany will show a negative number and that will put the euro under some renewed pressure," he said.
EUR/USD Spot & One-Month Implied Volatility
Source: JPMorgan
