One-month euro/dollar implied volatility leapt to 12.2% on Monday last week from 10.6% but then sunk back to 10.65% by Thursday. The move came as a knock-on effect from the sharp moves in dollar/yen spot rates and one-month vols. The dollar depreciated against the euro, with spot rising to USD1.149 last Thursday from USD1.1255 the previous week.
One-month 25-delta risk reversals moved to 0.5% in favor of euro calls over euro puts from 0.2% over the same period. Traders said they had seen heavy volumes traded with business up 30-40% on the usual number of trades but not many exotic plays. Some of the business came from corporates repositioning hedges with few speculative trades.
Over the weekend a statement from the Group-of-Seven most industrialized nations said, "We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas." As a result of this, dollar/yen broke through the JPY116 barrier that the Bank of Japan had been defending, causing volatility to rocket to 14% on Monday from 10.6% the previous Friday. Euro/dollar moved on the back of this. Giovanni Pillitteri, v.p. in foreign exchange options trading at Deutsche Bank in London, said the euro/dollar curve, however, has now flattened whereas other dollar curves remain inverted. This indicates the market thinks that euro/dollar volatilities will now stabilize. Andrew Chaveriat, technical analyst at BNP Paribas in New York, predicts dollar/yen will now stay around USD1.15 for the next month.
EUR/USD Spot & One-Month Implied Volatility
