The biggest FX trade in the world is ever in the tightest range

The biggest FX trade in the world is ever in the tightest range

The most active foreign – exchange pair in the world is on track to post its tightest quarterly range since the euro began two decades ago.

The euro-dollar cross, which sees approximately $1.25 trillion in transactions a day, has been trading in a 3.4-U.S. From the beginning of 2019, center range. With turbulence at the lowest level in over a year in developed-nation currencies, strategists at Goldman Sachs Group Inc. and Societe Generale SA are not expecting it to break out in the near future.

Euro-dollar volatility, according to Goldman’s Zach Pandl, has crumbled in part due to slow growth on both sides of the Atlantic. This has encouraged both the Federal Reserve and the European Central Bank to be cautious about their future paths of monetary policy. While he anticipates the stabilisation of Europe’s economic data before America’s, Pandl says the FX stalemate is likely to persist for several months to come.

“The two economies are more similar at the moment than they are different-they both see weak growth and dovish central bank shifts,” said Pandl, the company’s global currency and emerging-market strategy co-head. “At the end of the day, we think the euro picture picking up breaks that range, but for several months it’s been going nowhere fast.”

Euro – Dollar Crater Volatility

On Thursday in New York, the euro was trading at about
$1,1383, close to the middle of the $1,1234 to $1,1570 band it has been
confined to since Jan. 1. Pandl predicts that in three months the pair will
shake off the torpor with a $1.17 climb as the U.S. economy decelerates faster than Europe’s.

Kit Juckes, SocGen strategist, agrees. He predicts that by
the end of December the euro will climb to $ 1.20 – but it’s going to be a
grind to get there. The recent dovish policy pivot of the Fed has prompted
markets to reverse any remaining U.S. rate – hike wagers, while expectations
for tightening the ECB remain low.

“The first piece of low vol recipe is low, steady
rates,” said Juckes. “You have the central banks of the G-3 on hold
and you are reassured that the peak rate level in this brave new world is much lower than your worst nightmare.”

Benchmark 10-year Treasury yields in February have swung
just 11.6 basis points, on pace over the past two decades for the smallest
monthly range. According to a JPMorgan Chase & Co. gage based on
three-month at – the-money forward options, this has helped push volatility in Group-of-Seven currencies to the lowest since January 2018.

The tranquillity cannot last indefinitely, of course. According to Juckes, a favourable breakthrough in on-going Brexit negotiations might see the euro follow the pound higher, while the swelling US budget deficit will eventually erode the appeal of the already “costly” dollar. But volatility is likely to
dive even further before currency turbulence returns, he said.

“I will never forecast low vol forever, but right now it feels like vol will get
squeezed a little further,” said Juckes. “I can see things that are
going to vol – induce – I can’t see them today.” 

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