Higher-than-anticipated U.S. consumer confidence levels and the European Central Bank's decision not to lower interest rates caused the euro spot to decline last week, but this did not deter some investors from buying short-term euro calls. Shortly after the ECB made its announcement, a foreign exchange trader in New York said that trading of one and two-month euro calls was still fairly heavy, with typical notional sizes of between USD100-200 million.
Other investors were more wary and opted for dollar calls.
Anders Henrikson, head of foreign exchange options at Citigroup in New York, said uncertainty about the euro was causing investors to purchase short-dated dollar calls.
After the U.S. released consumer confidence data last Tuesday, one-month implied volatility stood at around 12.55%, said a foreign exchange trader in the Midwest. Implied vol rose to 13.1% on Thursday, the day of the ECB announcement. The trader in the Midwest said that volatility, which had closed at 12.7% on March 23, increased last week because the euro was declining in the spot market. The euro steadily declined last month from its level on the first day, USD0.9294.
The foreign exchange trader in New York who saw heavy trading of euro calls said it was "counter-intuitive" that there would be interest in this product at a time when the euro spot was declining. "Some people refuse to believe that the euro will go down," he said. He added that the ECB was considering cutting interest rates on April 11, so purchasing short-term euro calls would make sense for those who take the position that rates will be cut at that time.
