Euro fetching less than $1 becomes hot call for options traders
By Bloomberg
The foreign-exchange market is starting to realize the euro’s tumble may not end at parity.
There’s an almost one-in-four chance the euro will end the year below $1, options prices suggest, up from 5 percent at the end of 2014 and 11 percent on March 1, before the European Central Bank started bond purchases that have sent the currency sliding. The euro, which hasn’t fallen below $1 since 2002, was at $1.0618 at 7:25 a.m. in New York, down from last year’s high of $1.3993 in May.
ECB President Mario Draghi is debasing the region’s currency by flooding its struggling economy with 1.1 trillion euros ($1.2 trillion). At the same time, the Federal Reserve’s moving closer to raising interest rates, making the dollar more attractive. Goldman Sachs Group Inc. predicts the divergence in monetary policy will send the shared currency lower, extending this year’s 12 percent slide.
“We will print parity and we will trade through it,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London, who sees the euro trading one-to-one with the dollar in three months and extending the slide to 95 U.S. cents this year. “It is in part a function of the ECB going one way and the Fed going the other.”
Robin Brooks, chief currency strategist at Goldman Sachs in New York, cut his 12-month euro forecast on March 13 to 95 cents from $1.08. He also reduced his 2016 estimate to as low as 85 cents, from $1.
Bearish Calls
“After all these years of extraordinary monetary accommodation, which prevented the dollar from trading its true strength, we see the coming normalization of U.S. monetary policy” as an important catalyst, Brooks wrote in an e-mail on March 13.
Credit Suisse Group AG joined other banks this month in forecasting the common currency will drop through parity.
Those calls are still more bearish than most. The median estimate of more than 60 analysts in a Bloomberg survey is for $1.07 at year-end.
Traders attribute a 23 percent probability to the euro trading below $1 on Dec. 31, options prices compiled by Bloomberg show.
Options currently reflect the most bearish outlook in about three weeks for the 19-nation currency among investors and companies that buy protection against swings in the currencies. In volatility terms, the premium for one-year options to sell the euro against the dollar versus those allowing for purchases is 2.4 percentage points, the most since Feb. 24, risk-reversal data show.
Dollar Strength
Analysts are struggling to keep up with the pace of the euro’s decline even after cutting their predictions by about 9 percent from $1.18 at the end of 2014.
“You have Draghi and Yellen moving policy in rather different directions, so a lot of analysts are currently rewriting their forecasts,” said Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen, who said Tuesday she expects the euro to drop to 99 cents in the next six months. “We’re certainly not the only ones to be surprised by the violence of this move.”
Not everyone thinks the euro can keep falling. Mizuho Bank Ltd. says it’s ripe for a rebound after weakening too fast and cites one of the world’s largest current-account surpluses as a reason the exchange rate should rally.
Almost 90 percent of economists surveyed by Bloomberg predict Fed officials will end their pledge to be “patient” on raising rates from their policy statement Wednesday. Some 45 percent saw this as a step toward a June increase in rates, which have been held near zero since December 2008, according to the survey of 49 respondents conducted March 12 and 13. Thirty- seven percent saw a rate boost in September.
Policy Divergence
Draghi’s policy priority is to avert a deflation spiral for the nations that share the euro. Annual consumer prices fell in each of the three months through February.
“There’s a fairly strong consensus that the euro keeps going down toward or through parity,” said Steve Barrow, head of Group-of-10 strategy at Standard Bank Plc in London. He said he expects the common currency to trade at 90 cents in the next two years. “The story on monetary divergence between the Fed and the ECB is still probably likely to keep euro-dollar falling.”