(Bloomberg) — Options markets are flagging the worst weekly retreat for the euro since July, as traders bet the European Central Bank will cut interest rates next week.
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One-week risk reversals, a key options metric used to gauge market sentiment and positioning, were at the most bearish level for the euro in three months on Thursday. The contracts now cover the ECB’s decision on Oct. 17.
Last week’s US jobs report has challenged the narrative that the ECB will lag the Federal Reserve in cutting interest rates — dimming the appeal of the common currency. The euro whipsawed after data showed US inflation was hotter-than-expected and jobless claims rose more than economists projected.
Since the US payrolls data, hedge funds have rushed to add euro bearish exposure on over-the-counter trades this week, according to FX traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
The euro currently trades close to $1.0930, near the lowest level since mid-August. Data from the Depository Trust & Clearing Corporation show that traders position for a move weaker toward the $1.08 handle.
Given relative neutral-rate estimates, the common currency could drop to $1.07 in the event the gap between Fed and ECB terminal rate pricing moves closer to 170 basis points than the 130 basis points currently priced, according to Deutsche Bank AG analysts. In the scenario of a global trade war involving China, the ECB would be forced to cut below neutral, sending the euro to parity.
Rate Bets
Money markets are pricing 44 basis points of easing by the Fed, compared with 47 basis points from the ECB. That contrasts with August and September, when the FOMC was seen delivering at least an extra quarter point of easing.
In comments on Wednesday, San Francisco Fed President Mary Daly left the door open to just one more rate cut this year. Fed minutes released Wednesday showed there was a preference among some officials to cut rates at a more gradual pace.
(Updates with moves after US data, Deutsche Bank view.)
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