Who’s got it right when it comes to betting on the euro?
The euro is a curious currency – not least with volatility hitting an all-time low this week – in trading so far this year. On the darker side of things, you have the ECB deepening negative rates and reintroducing QE with a weakening economy.
And yet markets continue to want to believe in a Eurozone recovery as we look towards next year. Sure, there are some green shoots here and there but can we be certain?
Well, the options market has been trying to send that message for a while now as we see 1-year risk reversals in EUR/USD continue to climb and even sitting in positive territory (calls > puts) at the moment.
However, spot price movement continues to be lackluster. Is it because of the lack of volatility or do spot traders just not feel that a Eurozone economic recovery is a given?
Whatever the case is, it is certainly an interesting one. There have been plenty of bank forecasts expecting a better euro area performance in 2020 and given how things have stabilised somewhat in the last two months, perhaps it stands to reason why people are starting to believe in that even more.
We can only wait and see to tell who’s got it right – options or spot traders – but if it is the former, then the euro may have quite some adjustment to the upside overdue in the coming months as we look towards next year.