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Euro Bearish Bets at Stretched Levels Point to Rebound in Spot
By Vassilis Karamanis
(Bloomberg) — The euro fell to its lowest since June 2020 on Thursday as post-Fed price action boosts the dollar across the board. The options space follows suit, although the move may have gone too far, too fast.
Demand for downside exposure in euro-dollar comes from various names, with corporates and hedge funds most active through options plays, targeting a move below 1.10, according to two traders in Europe
Reverse knock-outs are also bid as realized volatility fails to excite; note month-end demand is also dollar supportive
As a result, the euro’s volatility skew shifts lower with one-week risk reversals at 41 basis points in favor of euro puts, the most in more than two months
One-month risk reversals also at -0.41 vol, two standard deviations away from the mean
Such moves have been historically seen as overstretched and momentum shifted soon after, with demand for euro calls gaining traction
The correlation between one-month riskies and spot is strong and thus a rebound in the cash market may also be due as we head into the European Central Bank meeting next week
Some information comes from FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly
NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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