One-month risk reversals in the euro against the dollar switched to favor euro calls last week after the common currency appreciated against the greenback. Risk reversals moved to 0.2 in favor of euro calls on Wednesday from 0.7 in favor euro puts the previous week. The trading was mainly on the back of a rising euro--traders said that as the common currency crawled past USD0.90 on Wednesday, proprietary traders and hedge funds started buying 25-delta euro calls. Typically notionals were USD10-15 million. One-month implied volatility rose to 13.4% Wednesday from 12.95% the previous Wednesday as demand for options increased.
Ian Stannard, foreign exchange strategist at BNP Paribas in London, said a change in dollar sentiment has caused the euro to appreciate against the greenback. From the beginning of the year until last week a fall in U.S. equity markets sparked a switch into U.S. bonds as investors looked for safer assets. The picture in the U.S. is growing more grim, however. Investors are losing confidence in the Federal Reserve's ability to quickly remedy the ailing U.S. economy, and are moving funds from the U.S. to Europe, said Stannard. Worse-than-expected German unemployment figures were issued last week, which would normally dent the euro but the common currency shrugged the data off and continued to rise, said Stannard.
