One-month implied volatility on the euro/dollar stayed range bound last week even as the euro inched closer to breaking through its next ceiling. Spot made a leap toward the USD1.3 mark last Tuesday reaching USD1.293, before bouncing back to trade at USD1.27 the next morning, said one trader. One-month implied volatility on the currency pair, however, fluctuated only marginally, rising to 11.3% last Wednesday, compared with 11.04% at the beginning of the week, he said. It had traded as high as 11.5% the week before.
Comments from European Union ministers set off concerns that central banks would look to intervene in the currencies and this set back the upward march of the euro, the trader said. The number of barrier options sitting at USD1.3 is also providing resistance to the rise of the single currency, however, traders think that the general slide of the dollar will be too overwhelming for the barrier to hold indefinitely. In the meantime, a popular trade has been to purchase short-dated euro calls/dollar puts with high reverse knock outs, struck at USD1.34, the trader added.
T.J. Marta, foreign exchange strategist at Citigroup Global Markets in New York, noted that the dollar made gains against several currencies. While the European Central Bank appears to be comfortable with interest rates it is looking more and more likely that the Federal Reserve will hike rates and if this occurs it would also hold back some further strengthening of the single currency, he said. Marta predicts that the euro will be trading over USD1.3 by year-end.
