With world’s biggest FX trade shackled, investors get creative
THE WORLD’S MOST widely traded currency pair is stuck in its deepest rut since 2014. With few signs it’s poised shake the malaise anytime soon, traders are being forced to get creative.
The euro- dollar cross, which sees about US$ 1.25 trillion ( RM4.8 trillion) of turnover a day, or a quarter of all global foreign- exchange volume, has been confined to a four- cent range between US$ 1.2155 and US$ 1.2555 since mid- January. That’s the narrowest threemonth band since 2014, according to data compiled by Bloomberg. With implied volatility approaching the lowest in more than three years, strategists see few catalysts for the pair until the second half.
Well-telegraphed interest-rate expectations from the Federal Reserve and a lack of policy guidance from the European Central Bank are largely to blame for stifling the pair, even in the face of heightened trade and geopolitical tensions, market watchers say. For FX traders who traditionally depend on volatility to make money, it means looking further afield for ways to profit. Here are some of the strategies they’re turning to: Strategy No. 1: Volatility plays
Investors anticipating that the euro- dollar pair will continue to trade sideways can capitalise on that view with a double-no-touch strategy, according to Valentin Marinov, head of G-10 foreignexchange research at Credit Agricole. The trade proves profitable if a currency pair stays within a predefined range for a specified period.
Marinov recommends a wide range between US$ 1.2100 and US$ 1.2550 (versus around US$ 1.2290 currently), where he expects the pair will trade until the ECB provides further clarity on when it will taper its bondbuying programme. ECB policy makers see scope to wait until their July meeting to announce how they’ll end the programme, according to euro- area officials familiar with the matter. Strategy No. 2: Look elsewhere
Though euro- dollar transactions account for roughly a quarter of daily foreign- exchange turnover, FX traders shouldn’t feel chained to the popular pair, said Societe Generale strategist Kit Juckes.
Uninspired euro- dollar traders need look no further than crude oil for new ideas. Among the year’s best-performing currencies are the crude-linked Colombian peso, Mexican peso and Norwegian krone, which have followed oil’s roughly 12.5 per cent year-to- date climb.
The yen could also be poised to excite. Flight-to- quality bids have pushed the Japanese currency up about five per cent against the dollar in 2018 amid mounting global trade tensions. Juckes predicts that the dollaryen pair will “go mental” once the prospect of policy tightening from the Bank of Japan becomes realistic. Strategy No 3: Embrace the range
Traders looking to profit from euro- dollar cross should consider simply embracing the range, according to Shahab Jalinoos, global head of FX trading strategy at Credit Suisse Group. A stagnant exchange rate usually lends itself to selling volatility, but that’s a tough call for him to recommend with three-month implieds already so low.
Instead, investors would benefit from heeding recent highs and lows. “Rigidly” following a strategy of selling near US$ 1.2500 and buying toward the March low of US$ 1.2155 will allow you to profit from price swings within that range, said Jalinoos.