Implied volatility on the euro/dollar rose last week after Alan Greenspan, chairman of the Federal Reserve, told congress that he was unlikely to hike interest rates in the near term. One-month implied volatility jumped to 11.5% after the speech from 11.18% on Monday. It was trading at 11.81% the previous week.
Greenspan's speech also sparked a drop in the dollar to USD1.28 against the euro on Wednesday, down from USD1.269 on Tuesday. Hedge funds took advantage of euro highs following Greenspan's testimony to buy one-month euro downside strikes, predicting that the euro would drop off in the long term.
As the dollar depreciated market players switched from selling to buying gamma and volatility, indicating market expectations that the dollar would continue to fall and volatility will rise. One banker at a German house commented, "There's good two-way interest across the curve."
Ian Stannard, foreign exchange analyst at BNP Paribas, said, "Greenspan's speech was taken as quite a bearish position on the dollar. We're now expecting to see euro/dollar test the spot highs we saw at the beginning of the year."
The dip in implied volatility at the start of the week was caused by fx professionals selling options across the curve, according to traders. Market participants had been expecting last weekend's Group-of-Seven meeting to fuel a further decline in the greenback. When this failed to materialize it sparked large-scale selling of the downside options they had bought as a hedge.
EUR/USD Spot & One-Month Implied Volatility
