Euro Sinks to Edge of Dollar Parity as Pros Call It ‘Unbuyable’

admin date_range July 6th, 2022

One of the most common trades on the market is shorting the euro, and strategists from Nomura International Plc to HSBC Bank Plc have warned customers to anticipate further losses. The implied probability that the currency would reach parity against the dollar in the upcoming month is almost 50%, according to Bloomberg’s options-pricing model.

Investors are concerned about the risk that Russia could cut off gas supply to Europe, sending the continent into a recession, as the euro is at a 20-year low. The economic shock would likely make it more difficult for the European Central Bank to tighten monetary policy and likely increase the gap between European and US interest rates. On Wednesday, the dollar fell even more, reaching a low of $1.0187.

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According to Kaspar Hense, senior portfolio manager of BlueBay Asset Management, “It’s all about Russia.” “A major recession will occur in Europe if oil rationing occurs due to a reduction in Russian supply. It could be a very long winter.”

BlueBay has been shorting the euro since last month, according to Hense. Though it’s not their default scenario, he anticipates that if Russia cuts supply, the common currency will fall to 90 cents to the dollar.

German government representatives have expressed concern that a crucial pipeline carrying Russian natural gas to Europe would not operate at full capacity after scheduled repair this month. Given Russia’s “unpredictable behavior,” the International Energy Agency has issued a warning that a complete suspension in flows “cannot be eliminated.”

If the euro surpasses dollar parity, Tim Brooks, head of FX options trading at market maker Optiver, anticipates increased volatility. According to him, the demand for euro options is converging at lower levels between 0.92 and 1 in relation to the dollar. Jordan Rochester, a strategist at Nomura International Plc, said on Tuesday that he is even more certain than before that the euro will decline toward 0.98 by August.

According to Societe Generale’s Kit Juckes, chief global currency strategist, the euro “remains practically unbuyable this summer.” The dependence of Europe on Russian energy is decreasing, but not quickly enough to prevent a recession should the pipeline be shut down. The EUR/USD will probably drop another 10% or more if that occurs.

Wide Italian bond spreads are another source of concern, according to Van Luu, Russell Investments’ head of currency and fixed income strategy.

Luu, who has a minor short position, claimed that the current situation for the euro is “a perfect storm.” However, he continued, the currency is currently at low levels, and there is a strong probability it will strengthen in the coming year.

Given the confluence of events, he said, “I wouldn’t rule out parity, but personally I wouldn’t chase this move.” “At this time, I wouldn’t add to euro shorts.”

The belief that aggressive tightening in the United States will cause interest rates to rise more slowly in the euro zone has haunted the currency for months. Due to the weak economy in the area, traders are also anticipating less overall tightening.

According to Andy Bloomfield, head of macro research at Record Currency Management, “a lot of capital has poured into the US, but unless there is something luring it outside then the dollar can stay strong.” “You need to have a brighter economic outlook in Europe and other areas for it to be lured outwards,” the economist said.

 

 

 

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