Investors should use options rather than the spot market for bets the euro will decline before the Greek elections, according to Callum Henderson, global head of currency research for Standard Chartered in Singapore.
Greeks vote again on June 17 for a new government after an inconclusive election in May. New Democracy, Greece’s largest pro-bailout party, is favored by 22.7 percent of voters, followed by anti-bailout party Syriza with 22 percent and the socialist Pasok party, which also backs the bailout, with 11.2 percent, according to a May 31 poll of 1,200 people questioned by Metron Analysis for Athens-based ANT1 TV.
“If you have a Greek election whereby New Democracy and Pasok have a positive coalition, then you could see $1.30 in a heartbeat,” Henderson said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Or you could have the far left come in and we would have a rather dramatic selloff next week.”
The use of options would limit losses if parties in favor of the bailout came to power, he said.
The euro has declined 3.7 percent versus the dollar since the poll May 6 when Syriza surged to second place in balloting. It touched $1.2288 on June 1, the weakest since July 2010. It traded at $1.2589 at 12:37 p.m. in New York. Futures traders have increased net-short positions to a record 214,418 contracts according Commodity Futures Trading Commission data.
Investors were paying a record 4.4 percentage point premium to buy one-month puts, the right to sell the euro against the dollar over calls, the right to buy, in November. That payment has fallen to 1.81 percentage point.
The yield on the 10-year German bund has risen 16 basis points, or 0.16 percentage point this week, signaling investors are nervous about the crisis’s effect on German banks.
It “signals people are nervous about Europe period,” Henderson said. “Germany is a safe haven to only some extent, and the extent is how German banks are affected by this -- and, of course, they will be affected.”