Hedge funds and proprietary trading desks were the most active in the foreign exchange market last week buying one-week euro calls/dollar puts at the start of the week thinking the dollar would weaken in the wake of the continuing U.S. war on terrorism. But after military success showed there was actually a risk of the dollar strengthening they quickly reversed their positions, flipping the risk reversal to favor euro puts/dollar calls by 0.1 vol from 0.2 vol in favor of euro calls, according to New York-based traders. However, one-month implied volatility remained stable last week, at about 10.5%.
"People, mostly hedge funds were trying to get out from their earlier moves and then began reassessing," one trader said. He added that the slowdown in trading was prompted by an overall slowdown in merger and acquisition activity in the U.S. and low corporate earnings. Traders said volumes have continued to remain historically low ever since the Sept. 11 attack. Most of the options were at-the-money with spot fluctuating around USD0.8825 throughout the week.
Robert Podorefsky, chief strategist at FleetBoston Financial in Boston, predicted that the dollar would remain strong on the back of the U.S. fight against terrorism. He also predicted that activity in the foreign exchange market would remain stable. "The dollar has continued to remain strong even though some thought it would suffer," Podorefsky noted, adding that military action would continue to fuel the greenback's strength over the next month.
USD/EUR Spot & 25-Delta Risk Reversal
