Eurotraders are speculating how far the currency could fall below $1. The single currency may fall even lower if the parity is broken, in particular, to $0.95.
The single currency flirts with parity against the US dollar for the first time since 2002. Now that decades of historical support levels have been broken during this month’s downturn, the market’s attention is turning to how low it could fall.
Looking for the bottom. Bearish bets on euro options are focused on strikes above parity and $0.9850. Source: DTCC, Bloomberg. Vanilla Options DTCC This Month
“1.00 is probably the biggest psychological level in the forex market and a breakout looks increasingly likely,” said strategists at ING Groep NV led by Chris Turner. “If 1.00 were to break, we would expect volatility to rise sharply and most likely gap down the EUR/USD.”
The next stop could be $0.9850, the level that the latest round of options betting is signaling as a potential short-term day. According to the Depository Trust and Clearing Corporation, last month investors did not plan to bet on a parity breakout. However, since July 1, bearish bets have also been focused on lower strikes, and $0.95 has slowly become the favored strike price for options traders.
The currency’s downward spiral has been fast and tight considering it traded around $1.15 in February. Russia’s NWO in Ukraine has worsened growth prospects for the eurozone economy and pushed up the cost of energy imports, while a string of ever-larger interest rate hikes by the Federal Reserve have driven the dollar up sharply.
This puts the European Central Bank in a stalemate. So far it has resisted aggressive tightening by central banks around the world, signaling that it will raise borrowing costs by a quarter of a point later this month. This is likely to widen interest rate differentials, which will keep pressure on the single currency.
Some warn that a chaotic fall in the euro could lead to more declines. Technically, there is little support below parity to the January 2000 low at $0.9668.
Euro at parity may turn out to be a timid forecast.
Others also wonder where the bottom is. George Saravelos, head of foreign exchange research at Deutsche Bank AG, said the fall to $0.95-$0.97 would be in line with the historical extreme fluctuations seen in foreign exchange markets since the end of Bretton Woods in 1971. Strategists at Nomura International Plc warn of a „non-linear” fall to $0.95.