Tuesday, September 30, 2014

Euro Drop to $1.20 Seen by Nomura on No Crisis: Chart of the Day

The euro will weaken more than 5 percent against the dollar by June in a slide that option traders forecast will be slower than the tumble during Europe’s debt crisis in 2012, according to Nomura Holdings Inc.

The CHART OF THE DAY shows that hedge funds and other large speculators boosted wagers this month on the euro’s drop to the most in more than two years, based on the weekly Commodity Futures Trading Commission data.

It also tracks options pricing that’s much less bearish, with risk-reversal rates little changed this quarter, signaling expectations for gradual declines.

Nomura predicts the shared currency will fall to $1.20 by mid-2015 as the European Central Bank signals further monetary stimulus that tends to weaken the currency, while the Federal Reserve stays on course to end bond purchases next month.

The euro dropped more than 7 percent this quarter to $1.2684 on Sept. 26 in New York. “People are expecting euro weakness, but not a precipitous fall,” Yunosuke Ikeda, Nomura’s Tokyo-based head of currency strategy, said by phone on Sept. 25.

“This time, the theme is widening interest-rate differentials between the U.S. and Europe, not a crisis.”

Hedge funds and other large speculators held 141,965 more bets on euro declines than wagers on gains as of Sept. 23, after net shorts reached 161,423 on Sept. 2, the most since July 2012, CFTC data show.

Traders are using options strategies to bet on a measured decline in the euro, limiting the impact on the risk-reversal rate, according to Ikeda.

The premium of 71 basis points on options to sell the euro over those to buy is half the level seen the last time futures traders were this bearish in July 2012, the month when the euro slid to a two-year low of $1.2043.

The difference in cost between put and call options is called the risk-reversal rate.

bloomberg.com

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