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Derivatives

Cable Vol Spikes As Sterling Stages A Comeback

Implied volatility on cable jumped last week after sterling recovered from a sell off the previous week.

Implied volatility on cable jumped last week after sterling recovered from a sell off the previous week. One-month implied vol on the currency pair rose to 11.7% last Wednesday, compared with the previous week's high of 10.7%, according to a New York-based trader. Meanwhile, sterling traded at USD1.81, compared with USD1.84 the week before. Sterling hit a low of USD1.79 during the week, the trader added.

A lack of major announcements and new data meant that the currency pair underwent no major moves with market flow also being light, the trader said. Option buying centered on purchasing short-dated sterling puts/dollar calls as a means of gaining gamma. With no large announcements expected to impact the currency pair over the coming weeks, volatility is likely to head downward, he added.

Steven Englander, chief currency strategist for the Americas at Barclays Capital in New York, noted that the Bank of England appears alone among central banks in taking a hawkish view of its domestic economy and this will support sterling. Other high yielding currencies, including the New Zealand and Australian dollars, have been hit by negatives while the U.K. stands out among Group of 10 in how well the country has gone through the global economic downturn. Englander anticipates that sterling will continue to strengthen against the greenback in the coming weeks.

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