London-based traders bought euro calls/dollar puts with strikes at parity last week. The buying spree was initiated by dollar spot falling against the euro because of lower-than-expected National Association of Purchasing Management manufacturing survey figures published on Tuesday. The options had maturities of one-three months. The notional sizes were between USD20-50 million. One-month implied volatility stayed high amid the rise in spot, rising to 14.7/15% on Wednesday from 13.7%/14.1% the previous Friday. The lower-than-expected data led vol to rise, but traders added that some increase in vol was to be expected anyway. With the new year, players no longer fear time decay from holding options over the holiday season, and there is hence pent-up demand for options, which would lead to vol increasing. Spot rose from USD0.9305 on Friday to USD0.9460 on Wednesday.
Hans Redeker, head of foreign exchange strategy at BNP Paribas in London, said that the NAPM data showed that a hard landing in the U.S. was a real possibility. The Federal Reserve's 50 basis point interest-rate cut Wednesday will take about 10 months to filter through to the economy, and in the meantime, the euro will continue to appreciate. He added that he expects another 100 basis point cut in the next six months, which would also suggest that the euro will strengthen. BNP Paribas' three-month forecast for euro/dollar is EUR1.02 and its six-month forecast is EUR1.05.
