Investors' bearishness about the single currency is becoming more entrenched. The clearest sign is not the euro's slide back below $1.09 for the first time in nearly a month. After all, its short-term fortunes depend on when US policy rates will rise and events in Greece. Instead, investors' long-range pessimism is laid bare in the foreign exchange options market.
Derivatives which give investors the right to sell euros have long commanded a premium over ones that allow them to buy the single currency. But what is notable is that the premium for put options expiring between six months and one year from now is at its largest since 2012. This shows a strong and persistent bias against the single currency. Such a firm preference is all the more remarkable because the single currency rose 10 cents from 12-year lows in March, hitting peaks above $1.1450 on May 15.
There is a good reason why euro bears are so convinced. US Federal Reserve Chair Janet Yellen looks likely to raise interest rates at some point this year while European Central Bank President Mario Draghi will keep buying euro zone government bonds well into 2016. Consequently, investors believe the single currency will eventually weaken against the dollar.
What's curious is that the strong conviction about the longer term coexists with some near-term doubts resulting from uncertainty about what sort of surprises the US economy might spring in the coming months. It is also still unclear whether Greece will reach a deal with international creditors before its money runs out in the coming month or so. These near-term doubts are reflected in the implied volatilities of euro/dollar options. Normally, the longer dated an option, the higher its implied volatility, which reflects how much exchange rates are expected to swing. But the reverse is true at the moment.
After recent market gyrations, euro pessimists can hardly be blamed for giving themselves more time to be proved right.
Derivatives which give investors the right to sell euros have long commanded a premium over ones that allow them to buy the single currency. But what is notable is that the premium for put options expiring between six months and one year from now is at its largest since 2012. This shows a strong and persistent bias against the single currency. Such a firm preference is all the more remarkable because the single currency rose 10 cents from 12-year lows in March, hitting peaks above $1.1450 on May 15.
There is a good reason why euro bears are so convinced. US Federal Reserve Chair Janet Yellen looks likely to raise interest rates at some point this year while European Central Bank President Mario Draghi will keep buying euro zone government bonds well into 2016. Consequently, investors believe the single currency will eventually weaken against the dollar.
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After recent market gyrations, euro pessimists can hardly be blamed for giving themselves more time to be proved right.