Positive U.S. Economic Data Triggers Dollar Call Buying

Market players snapped up short-dated greenback calls and yen puts last week after positive U.S. economic data overshadowed speculation of a Chinese renminbi revaluation, which had players selling the dollar the previous week. In the spot market, the greenback appreciated against the yen, hitting JPY105.56 last Wednesday from JPY104.9 the week before. One-week implied volatility ticked up to 8.4% at the end of last week from 8.3% at the start, but it was down on the previous week's high of 8.9%.

Last Wednesday the U.S. Commerce Department reported the trade deficit hit a 6-month low in March, triggering renewed interest in long dollar positions. But the market was caught short due to months of greenback bashing, said Rob Kelly, a senior foreign exchange options trader at Société Générale in New York. He added traders avoided long-dated options because investors are still worried about dollar declines off the back of a Chinese revaluation. Market players believe this could happen on Wednesday, when The China Foreign Exchange Trading System is opened up to trade more currencies, including the greenback, euro and yen.

Kenneth Landon, v.p. and senior currency strategist with JPMorgan in New York, noted a revaluation could cause Asian currencies to appreciate against the dollar. But market uncertainty could also lead to a selloff of Asian money, he said, explaining a crawling peg--in which China does an initial revaluation of the renminbi and then allows for continued price appreciation--creates uncertainty in the market which could drive up implied volatility. "It could go either way," he said.