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Euro/Dollar Implied Vol Eases

29 May 2004

One-month implied volatility fell to 10.8% last Thursday, down from around 11.4% the previous week, after trading quietened in the lead up to the U.S. Memorial Day long weekend.

One-month implied volatility fell to 10.8% last Thursday, down from around 11.4% the previous week, after trading quietened in the lead up to the U.S. Memorial Day long weekend. The dollar weakened against the single currency to USD1.226 in the spot market last Thursday, from USD1.19 seven days previously as foreign exchange players nervously anticipated the release of non-farm payroll figures, scheduled for June 6, he noted.

Concerns on the impending employment figures as well as the possibility of an increase in inflation and Federal Reserve sluggishness on interest-rates skewed risk reversals on the currency pair to favor dollar puts/euro calls, according to the trader. In spite of this trend, the dollar may still get a pick up from corporates waiting for attractive exchange rates to offload euro hedges, he noted.

Rebecca Patterson, global currency strategist at JPMorgan in New York, said in the short-term the dollar is likely to remain relatively weak and will trade around USD1.22 at the end of September. Major factors influencing the currency pair in the coming weeks will be the release of employment data, the meeting of the Organization of the Petroleum Exporting Countries, scheduled for June 3, and the possible passage of the Homeland Investment Act through the House of Representatives. Patterson expects employment data to be disappointing and OPEC not to surprise, so thinks these will both be dollar-negative. By contrast the Homeland Investment Act, which if passed will encourage the repatriation of funds into the U.S., would boost the greenback. Any benefits, however, would likely only be temporary, she said.

 

29 May 2004