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Derivatives

Euro/Dollar Vol Drops On Greenback Rally

One-month euro/U.S. dollar implied volatility was heading lower on the holiday-shortened week Wednesday after whip-sawing over the previous week.

One-month euro/U.S. dollar implied volatility was heading lower on the holiday-shortened week Wednesday after whip-sawing over the previous week. The greenback rallied in the spot market last week after giving up gains it had made on the back of strong U.S. non-farm payroll numbers on April 2. One-month vol stood at 11.2% Wednesday, slightly off its recent peak of 11.9% on March 31. Meanwhile the euro eked out a modest appreciation against the greenback, changing hands at USD1.217 in the spot market Wednesday, versus a low of USD1.198 Tuesday morning.

In the options market, traders reported a lack of directional trades ahead of the long holiday weekend. Conversely, very short-dated options were strongly bid. Traders were clamoring to purchase euro puts/dollar calls with maturities of only several days, according to one options dealer. He predicted the greenback would regain steam in the short term and strengthen as far as USD1.18 in the next fortnight.

T.J. Marta, foreign exchange strategist at Citigroup Global Markets in New York, disagreed. Although the U.S. economy continues to show signs of recovery, the possibility of a blow out in the U.S. trade deficit could see the greenback weakening to the mid-USD1.20 levels over the next three- to six- months, he said.

Meanwhile, implied volatility on the Taiwan dollar/U.S. dollar continued to fall as post-presidential election jitters eased. "We're not far from historical lows as the election seems to have sorted itself out," said an fx trading head. Three-month implied volatility fell to around 3.7% last week from highs near 4.1-4.2% shortly after the election.

"There's been a lot of supply from onshore customers," said Conrad Kwok, head of fx options at DBS in Singapore. In particular, onshore financial institutions have been active sellers of short-dated U.S. dollar calls/Taiwan dollar puts, which has suppressed volatility. Spot last Thursday was around TWD32.89.

EUR/USD Spot & One-Month Implied Volatility

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