Euro/U.S. dollar implied volatility plummeted to new lows last week and spot backed off of recent highs as hedge funds unwound bearish dollar positions from the week before. One-month implied volatility dropped to 6% Thursday from 6.6% Tuesday, while spot slid to USD1.281 from USD1.288.
Options traders reported strong hedge fund interest in buying front-end dollar puts ahead of last week's release of U.S. economic data and Federal Reserve minutes, but attributed the reversal to profit taking rather than any particular news on the data front.
Adam Cole, senior currency strategist at RBC Capital Markets in London, said weak U.S. retail sales figures should actually have contributed to dollar weakness and that the reversal was a reflection of the tight range spot has been trading in for months. "There was no fundamental news to bring [spot] back down," Cole said. "Everything said the dollar should go down. But [spot] dropped like a stone as soon as it looked like it was threatening the top of the range."
Traders said the unwinding started when EUR/USD spot approached the technical level of USD1.29. "The market rejected topside spot," said one London trader. "We tested it and it headed back down." Another trader added, "The market's been difficult the past few months and people just wanted to take profits."
Cole said lower-than-expected U.S. consumer price index figures--which the market was awaiting Thursday as DW went to press--would suggest an interest rate policy reversal. But he added there is currently no impetus for spot to break out of range and he expects vol to stay low through the end of the year.