Low Volatility May Give Euro Bulls Pause For Thought
The US dollar may have taken a dip versus the euro (EURUSD) on Monday after worse-than-expected US durable goods data but traders will be aware that durable goods is a pretty volatile number and tends not to influence currency markets for too long. This is perhaps illustrated by the spread of forecasts. Overall orders for durable goods in May fell by 1.1 per cent. US firm Citibank had expected minus 0.5 per cent while its fellow American bank Morgan Stanley had forecast minus 0.7 per cent.
As for the US firm Wells Fargo, it had opted for minus 1 per cent. It may well be that when Fed Chief Janet Yellen speaks on Tuesday, durable goods data isn’t probably going to be her main priority. On the euro side of the equation, as France’s Credit Agricole CIB wrote on Monday, in the FX option markets “implied vols are at low levels, with most pairs trading at the year’s low.” The French firm believes that “implied vols could remain at subdued levels.” ThomsonReuters IFR (TRIFR) picked up on the same theme arguing that “low vols are a growing risk for EUR longs” and suggesting that in a low volatility environment the FX market might be inclined to use the single currency as a funding currency in carry trades. Euro bulls might wish to consider that argument even if they dismiss it. And while comments from the European Central Bank’s forum in Sintra (which continues through to Wednesday evening in Portugal) as well inflation data releases from Italy (Wednesday), Germany and Spain (Thursday) and for the euro zone as a whole (Friday), may all prove to be market-movers, the question is whether any of those will be enough to spur traders to take the euro up to test its current 2017 peak of 1.1296 versus the dollar.
Written by Neal Kimberley, External Currency Analyst.