Finally, a major risk-off move pushed the Euro below the 1.0340 support today. I titled my last Market update with “(u)se Euro strength to buy downside protection”. And today was payday. But that doesn't make things any easier for long-term investors with Dollar needs. Implied Vols have risen to levels not seen in a long time. But they (the investors) cannot really take profit now with parity looming on the horizon. And hedges are not there to be sold in between.
Active traders, on the other hand, are in a much comfortable position. They can choose now between to start delta hedging their Dollar Calls (= Euro Puts) or to close their position completely. The EURUSD implied Vol tableau below (end of day data) shows a spike for ATM Vols between 1.00% and 1.25% compared to the last update of June 21st. Of course, this increase is smaller than for the 25 delta Euro Puts (which increased between 1.50% and 2.00%). But now the original 25 delta Puts have become more ATM Puts and should be compared accordingly.
In this respect, one can argue that 10.41% (3m) or 9.90% (1y) are still not extreme levels. Should the Euro fall further, Vols are likely to rise even further, straight towards parity. In this scenario ATM Vols should be closer to 11.50%/75% or even higher. A sustained recovery of the Euro would of course put pressure on implied Vols again.
(source: cme group, own representation)
Unfortunately, the EURUSD chart does not help much in decision-making. Below you can see the monthly view and with good will you might still find support above the big psychological 1.0000 treshold. But I would not want to rely on a point estimate that close to parity in the long-term picture. The more likely scenario is that the Euro will soon no longer be quoted with a 1 before the decimal point. How low the Euro will then fall or how quickly it can recover is the next question.
Good luck,
Sebbo