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Derivatives

Dip In Cable Spot Drives Implied Vol

The sterling/dollar spot rate jumped to USD1.844 from USD1.785 over the week, driving one-month implied volatility to nearly 10% from 9.4% the week before.

The sterling/dollar spot rate jumped to USD1.844 from USD1.785 over the week, driving one-month implied volatility to nearly 10% from 9.4% the week before. The surge coincided with the dollar's corrective rebound coming to an end, noted traders.

Cable is not usually more volatile than other currency pairs, but the speed of the turnaround in the spot rate pushed implied volatility higher and attracted consistent buying from investors punting on the dollar's weakness continuing.

A trader at a German bank noted that most trading reflected the fact that investors were nervous about both further dollar weakening and volatility moving higher. The main activity was in short-dated options, from overnight out to one-month options. These were popular because market makers were looking to buy gamma, explained the trader. Another trader said that the dollar's large pullback the week before had seen some investors liquidating long call positions and this week's action was dominated by traders looking to square off those positions.

Ian Stannard, currency strategist at BNP Paribas in London, thinks the dollar's corrective rebound appears to have ended and sterling is leading the upward trend against the greenback. He said, "sterling's move has been fuelled by uncertainty over possible interest rate rises and concern over the further weakening of the dollar."

GBP/USD Spot & One Month Implied Volatility

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