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The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Marc Chandler
NEW YORK (
BBH FX Strategy) --
1. As the world took a step away from the proverbial abyss with the firming of the U.S. economy and the European Central Bank's massive liquidity injections in the first quarter, the dollar suffered.
The re-establishment of positions that were liquidated in the fourth quarter and the unwinding of part of the large long dollar positions amassed were key drivers.
Those moves appear to have run their course. The dollar will likely trade better in the second quarter than in the first.
The main exception is the dollar-yen, where the yen is likely to recoup some of its outsized losses from the first quarter.
2. As the euro rose in the first quarter, implied volatility collapsed, falling to its lowest levels since
Lehman Brothers' demise.
Even if one does not trade options or follow them closely, it is important to appreciate that the compression of volatility is often like a coiled spring, and tends to precede large spot moves.
With volatility falling as the euro rose, it's likely to increase as the euro falls, and this is what has begun happening over the past couple of sessions.
Also judging from the pricing of puts and calls (as in the three-month risk-reversal), the discount for euro calls in late March fell to its lowest level since the first quarter of 2011.
However, this is reversing as participants buy puts (volatility is rising, so premium is being paid), and this also reflects the ascendancy of euro bears.
3. It is not just the case of the shift in views about the prospects for QE3. We have argued the economic conditions in Europe have deteriorated. We are concerned that there is still no closure in Greece despite the PSI. Italian and Spanish bond yields are rising, not falling, as are credit default swap prices.