Foreign exchange options traders piled into euro/dollar risk reversals last week to profit from euro/dollar movement. In the risk reversals the traders sold 25-delta one-month euro calls/dollar puts and bought euro puts/dollar calls causing the risk reversal to move to 0.35 vol in favor of euro calls on Thursday from one vol Monday. The strikes on the calls were around USD0.90 and the strikes on the puts were USD0.865 when spot was trading USD0.8952 on Thursday. A trader added several hundred million dollars in one-month twenty-delta euro puts went through the broker market on Monday.
A London-based foreign exchange strategist said bank's proprietary desks were putting on the trades for two reasons. The first was they expected the dollar to rally against the euro and the put to move into the money or alternatively they were buying the euros in the spot market and putting the risk reversal on as a zero-cost stop to the trade. In this trade the bank profits if the euro rallies to USD0.90 as it can sell the underlying.
Ray Attrill, director of analysis at 4CAST in London, said "the euro/dollar market has been caught flat-footed. It does not know whether to read the falling equity market or the strong economic numbers." He added that if there continues to be strong economic data out of the U.S. then the euro could break through the USD0.88 barrier but his prediction is for the euro to appreciate against the dollar to USD0.91 by the end of September. Hans Redeker, head foreign exchange strategist at BNP Paribas in London, said its prediction is for the euro to rally against the dollar in the short term, testing the USD0.92 levels in the coming weeks. But he added the bank's end of year forecast is for USD0.83.
