The euro’s serene summer may come to an abrupt end

August 29, 2013

By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The euro has been a haven of stability during a summer that has seen government bond yields leap, stocks crumble, and emerging markets slide. But the mood is souring. Some investors are so convinced the currency will weaken against the dollar that they are paying hefty premiums to express their bearishness in the options market.

Demand for options offering the right to sell euros for dollars is outstripping appetite for ones carrying the right to buy the single currency. As a result, the price of the former has moved to a chunky premium over the latter. In the case of one- and six-month options, these premiums have recently tested their highest levels since early July. For one-year options, the premium is wider than at any time since 2012.

It’s not the only signal suggesting the euro could break free of recent ranges. There is a growing gap between how much the euro has moved against the dollar and how much it is expected to gyrate in future. Expected – or implied – volatility has been rising even though muted moves in euro/dollar have depressed historic volatility. The gap between the two is the most marked in one-month options, and that suggests more violent swings are expected.

The moves are being driven by international investors and corporate entities with euro assets or receipts who use options to protect themselves against the risk of a drop in the currency. Traders placing speculative bets that the euro will weaken are adding to volumes. Of course, the euro will not automatically fall just because options market activity suggests it will. The currency markets are large, liquid, and ultra-sensitive to the emergence of fresh fears, or new hopes. At present, though, investors see euro bearishness coming to the fore. A U.S. non-farm payrolls report might emphasise the relative weakness of the Europe’s labour market. The dollar might strengthen around a Federal Reserve meeting at which the U.S. quantitative easing programme could be scaled back. Upcoming German elections may raise euro uncertainty too.

The euro’s summer of serenity could soon come to a rather abrupt close.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/