Euro: scarily calm
STOXX flat
Nasdaq futures down 0.1%
Nvidia forecast its slowest revenue growth in seven quarters
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EURO: SCARILY CALM?
The euro has dropped more than 3% against the dollar this month to a one-year low of $1.052, under pressure from prospects of President-elect Donald Trump’s proposed trade tariffs weakening the sclerotic euro area economy further and hastening European Central Bank rate cuts.
When assets fall in price, they tend to become more volatile, but traders do not seem to currently expect this of the euro.
The one-month implied volatility gauge EUR1MO= that reflects demand for protection against currency swings has eased to a moderate 7.8% from 8.5% on Nov. 5 when Trump regained the presidency.
In contrast, when the euro EUR=EBS dropped below $1 in September 2022, one-month implied volatility surged beyond 13%.
UBS FX analysts think there is scope for things to change in the coming months, and recommend a long 1-year euro dollar volatility swap trade. They say this volatility is at relatively muted levels, particularly compared with other pairs such as dollar/yen.
Many things could drive moves in euro/dollar. The timing and level of U.S. tariffs are uncertain, as is Europe’s ability to respond with economic stimulus after Germany’s governing coalition collapsed and France’s fragmented parliament descended into infighting over premier Michel Barnier’s proposed belt-tightening budget.
That, says, G10 FX strategist Alvise Marino, sets the euro up for a wild ride next year.
“Volatility is likely to be high, and certainly higher than markets are pricing in.”
“Europe might be somewhat short on leadership at the time the U.S. is implementing its economic agenda.”
“Is it fair to say the market is pricing in significant risks of capital market and trade flow turbulence? We think not.”
(Naomi Rovnick and Alun John)
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