The euro/U.S. dollar options market slumbered after the Federal Reserve cut U.S. interest rates by 50 basis points Wednesday. One-month implied vol rose to 13.5% Wednesday from 11.9% Monday, but trading was thin as players remained unclear on the future direction of the euro, said options traders. Kamal Sharma, currency strategist at Commerzbank in London, said immediately after the Fed announcement the euro fell to under USD0.87 against the dollar, but rose again to hit USD0.8850 within an hour and half. Sharma said the euro/dollar gyrated after the Fed cut because the market was shocked by the timing and confused about the reason.
At the beginning of last week, foreign exchange derivatives traders bought one-month euro puts/dollar calls because they expected the dollar to appreciate against the euro. The puts were struck at approximately USD0.87 when spot was trading around USD0.89 at the start of the week. The typical notional size was USD50-100 million. There was pent-up demand for the options because banks had sold short dated options prior to the long Easter weekend so they did not lose money from time decay. After the rate cut, trading was thin, as players were no longer as certain that the dollar would appreciate.
Commerzbank's three-month forecast for euro/dollar is USD0.93. Sharma predicts the euro will appreciate against the greenback because of stronger euroland growth. He also expects lower-than-expected U.S. labor data, which would indicate that consumer confidence and spending in the U.S. should fall.
