Reuters: US Dollar Report: Forex options show sharp slide in pessimism about euro

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Forex options show sharp slide in pessimism about euro Oct 3rd 2012, 21:05 By Julie Haviv NEW YORK | Wed Oct 3, 2012 5:05pm EDT NEW YORK Oct 3 (Reuters) - Expectations that Spain will ask for a bailout and the European Central Bank's latest policy moves have eased fears of the region's debt crisis, causing options investors to seek the least protection against the euro's drop in more than two years. The single currency shared by 17 countries has rebounded from a recent three-week low on beliefs that Spain, the euro zone's fourth largest economy, will soon join Greece, Portugal and Ireland in requesting a rescue. Risk reversals, a broad gauge of currency market sentiment, showed options investors have sharply cut back on their preference for puts, or the right to sell euros at a future date. "Tail risk has fallen and fewer people are betting against the euro," said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York. "Risk reversals are reflecting calmer waters, but we are not nearly in bullish territory for the euro," he said. If Spain requests aid, it will be viewed as positive for the euro because it would trigger Spanish bond buying by the ECB that would lower the country's borrowing costs. It would also remove an important layer of uncertainty in the region's three-year-old debt crisis. Three-month euro/dollar risk reversals remain biased to puts, trading as low as 0.90 percent on Tuesday and Wednesday, but that is a level not seen since March 2010, according to Reuters data. That means the collective market is less aligned against the euro than it has in recent years. That is also a significant improvement from Sept. 3 when it was at 2 percent and 2012's peak on May 21 at 3.575 percent. BUYING BONDS AND PEACE OF MIND Favorable factors for the euro have emerged over the past month, including the ECB's announcement of a program to buy unlimited amounts of bonds to lower yields on peripheral euro- zone debt and the U.S. Federal Reserve's unveiling of a third round of bond buying, called quantitative easing. The ECB holds its next policy meeting on Thursday. Few expect the ECB to announce new measures after last month's move, although an interest-rate cut may be down the road. The euro, trading at $1.2904, has eased from a four-month peak of $1.3169 in mid-September. The currency still faces plenty of headwinds that could contain gains, namely a dismal economic landscape, record high unemployment and lingering concerns about a Greek exit from the euro zone. "In our flagship hard-currency strategy, we recently indicated in public communication that Spanish Prime Minister Rajoy can single-handedly threaten the euro zone because of his lack of leadership," said Axel Merk, president and chief investment officer of Merk Investments and manager of the Merk Funds in Palo Alto, California. "In that context, we trimmed some of our recent euro purchases," he said. "However, we did not buy the U.S. dollar, but the Singapore dollar, our preferred safe haven." Merk, who oversees $600 million in assets, said in their more tactical absolute return strategy, they have been both long and short the euro of late. Meanwhile, implied volatility, or "vol", on three-month euro/dollar options, a measure of expected price swings and a gauge of options pricing, traded as low as 8.40 percent on Wednesday, not far from 8.25 percent hit on Sept. 14, which was its lowest since mid-December 2007. "Our expectations are very subdued for the ECB, and we are still in a holding pattern, waiting for Spain to ask for help," said Sebastien Galy, foreign-exchange strategist at Societe Generale in New York. "We expect euro/dollar to continue to stay range bound." "In the coming weeks, we expect euro/dollar to steadily grind lower," he said. Link this Share this Digg this Email Reprints

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