The cost of euro/dollar options fell last week as spot settled into a range between USD0.97-0.98. One-month implied volatility fell to 7.9%, down from 8.75% the week before. The options market has seen a lot of selling over the last few weeks with volatility approaching its lowest level since April or May, noted one trader in New York. Volatility in the equity markets isn't feeding through to the spot market with speculative investors, including hedge funds and bank proprietary desks, selling options as a result, added the trader.
Traders have been selling euro calls/dollar puts and buying euro puts/dollar calls, concentrating on short-term maturities including one-week and one-month. As the front-end of the volatility curve has been sold off, traders are now expecting the back-end to catch up. "The volatility curve will flatten until something happens to shake up spot," according to a trader.
Jason Bonanca, currency strategist at Credit Suisse First Boston in New York, thinks it is unlikely spot will continue to stand still for much longer. "It would be unusual to have three consecutive months of the euro/dollar spot rate not doing anything, particularly with the degree of geopolitical and economic uncertainty markets are facing," he added. Bonanca said the long term outlook, the next six to 12 months, for the greenback is slightly bearish, with the euro likely strengthening to stand at USD1.03-1.05.
EUR/USD Spot & One-Month Implied Volatility