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Derivatives

Implied Vol Falls As Dollar Limits Losses

The cost of dollar/euro options fell slightly last week as the greenback strengthened against the single currency, according to foreign exchange options professionals. One-month implied volatility fell to 12.25% by late Wednesday in New York, down from 13% earlier in the week. The inverse relationship between vol and the euro/dollar spot held true, as the dollar gained back some ground with spot at USD1.05 by Wednesday. It had been has high as USD1.15 earlier in the week, after the euro hit parity the previous Sunday. "I wouldn't use the word 'comfortable,' but the market is used to this situation now and we will need to see a breakout above USD1.2 to get vols much higher," said an fx options trader in New York. A common trade was for investors to purchase euro calls/dollar puts, ranging from one-month to one-year, with strikes above USD1.03. Despite the move lower in spot, 25-delta risk reversals still continue to edge in favor of euro calls, at 1.25 vol up from 1.1 vol.

Despite the dollar's one-day rally on Wednesday, its trend going forward still remains likely to be down. "It's the same old story, a crisis of confidence from both U.S. and international investors that's being seen in equities and dollars," said Andrew Chaveriat, fx technical analyst at BNP Paribas in New York. Now that parity has been reached and surpassed, he expects the euro to continue its run. "People buying those upside euro calls should do well," he said, noting the market is experiencing a major unwinding of the dollar's gains made in recent years. The bank's house view calls for spot to be USD1.2 by year-end.

 

 

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