The chairman of the Federal Reserve, Alan Greenspan, breathed life into the range-bound foreign exchange options market last Wednesday with a speech to the House of Representatives. The speech, which was not as positive on some aspects of the U.S. economy as expected, triggered renewed interest in buying two-week options to capture volatility over the Sept. 21 Federal Open Market Committee meeting to set interest rates. The euro strengthened against the dollar in the spot market to USD1.2161 on Wednesday, up from USD1.2078 on Monday. Despite the move in the spot market, implied volatility remained low compared to last week's dramatic rise ahead of the non-farm payroll data. One week implied volatility was at 8.9%, down from 9.2% the Friday before.
Greenspan's speech was interpreted by some market players as an indication that a rate rise was not definite, so there was demand to hold options over the FOMC date to capture volatility, said traders. There was strong interest in at-the-money straddles to cover the FOMC meeting, according to traders. Some market players were speculating on further weakness in the dollar by buying two-week euro/dollar calls with strikes at USD1.23 and USD1.24, which traders said were becoming significant barriers.
Ian Stannard, a currency strategist at BNP Paribas in London, said, "[Greenspan's] comments on the budget deficit might have scared the market slightly and put the dollar under some pressure." He noted, however, the overall outlook for U.S. growth is a positive one. "We believe the dollar will remain reasonably well supported," he added.
