World’s Biggest Currency Trade Stuck in Central-Bank-Induced Rutby
Euro is forecast to weaken versus dollar by year-end
Realized volatility falls to its lowest level since 2014
The world’s most widely traded currency pair happens to be one of the most boring as well.
The dollar has been hovering around its long-term average against the euro -- about $1.11 -- since November. Even amid the U.S. currency’s 3.1 percent decline against major counterparts in the past three months, its 1.1 percent depreciation against the euro was among the smallest. The lack of conviction is seen in the realized volatility, which dropped to the lowest since September 2014.
The standstill reflects a lack of clear policy path from central bankers worldwide. From quantitative easing to interest-rate divergence, monetary policies had been the dominant force since the financial crisis. The central-bank trade came to a grinding halt this year after the Federal Reserve unexpectedly signaled a slowing tightening path, and negative rates pursued by the European Central Bank backfired, undercutting traders’ conviction and prompting questions on whether officials have reached the limit of their ability to spur economic growth and inflation.
"You’re stuck in a groove -- the story line hasn’t really changed much," said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California. "The whole divergence talk, the more we talk about it, the more convergent it feels."
The dollar was little changed at $1.1379 per euro as of 8:15 a.m. in Tokyo Friday after rising 0.4 percent in New York. One-month realized volatility for the currency fell to 7.1 percent, the lowest since October 2014. The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, was steady after rising 0.3 percent Thursday.
Trading the euro against the dollar accounts for 24 percent of all currency deals, making it the most popular transaction in the world’s largest financial market, according to the Bank for International Settlements.
The lack of a clear trend has prompted some of the biggest dollar bulls to capitulate. Strategists in a Bloomberg survey predict the currency to stay near the current range at $1.11 through year end, compared with a forecast of $1.05 at the start of the year.
Deutsche Bank AG also revised its year-end forecast lower Thursday, projecting the dollar will strengthen to $1.05 compared with 90 cents. There’s limited room for investors to further reduce probability of a Fed rate increase this year, the German lender said. Futures traders cut the probability of an increase by the end of 2016 to 53 percent, from 93 percent at the start of this year.
"We remain euro-dollar bears expecting the next move outside of the well-defined $1.05-$1.15 range to be down," Deutsche Bank strategists Alan Ruskin and George Saravelos wrote in a note. "As long as there are multiple Fed rate hikes in the offing, and the funds rate peak is above 1 percent, the dollar will gradually re-assert itself as the favorite Group of 10 high-yielder."