More pain ahead for euro, traders’ derivatives bets signal – Reuters

Euro currency bills are pictured at the Croatian National Bank in Zagreb, Croatia, May 21, 2019. REUTERS/Antonio Bronic

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LONDON, March 2 (Reuters) – Traders are rushing into currency derivative markets to protect their portfolios against further euro weakness, a sign of broadening stress for European assets following Russia’s invasion of Ukraine.

The euro has slipped to the weakest since May 2020 at $1.1059, down 2% since last Thursday .

But that decline is modest compared to moves on derivatives, where bearish euro positions have more than doubled in the same period, suggesting investors are preparing for further weakness.

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One closely watched gauge of investor demand for options that give traders the right to sell the euro, versus the right to buy it, has slumped to five-year lows, indicating a bias to selling the currency. Three-month risk reversals on Wednesday dropped to March 2017 lows.

Currency options charge a premium in the direction deemed most likely, and the outbreak of war on Europe’s eastern border has cast a shadow on the regional economy.

“The FX options market in euro/dollar is extraordinary. Risk reversals have never been as extreme,” said Richard Benson, co-chief investment officer at Millennium Global Investments.

He attributed the moves in risk reversals partly to equity fund managers rushing to protect their European portfolios against another leg lower on the currency.

The drop in risk reversals has been largely focused on the short end of the curve with one-month risk reversals also plunging to their lowest level in nearly five years.

Options volumes betting on more euro losses are building too. Refinitiv data showed an outsize $4 billion-plus of euro options expiring at end-March.

“It makes sense to stay short on the euro before the weekend as we have [Federal Reserve Chair Jerome] Powell and NFP while the world watches in horror what’s unfolding in Ukraine,” Societe Generale strategist Kenneth Broux said, referring to U.S. non-farm payrolls data due on Friday.

The single currency has seen deepening inverse correlation with the price of oil and natural gas, a large proportion of which Europe sources from Russia. The price of crude oil in euros has soared to record highs above 100 euros per barrel this week.

“The more oil and natural gas push higher, the more the euro drops, pushing commodities priced in euros even higher – a vicious inflationary spiral,” Deutsche Bank strategist George Saravelos told clients.

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Reporting by Saikat Chatterjee and Tommy Wilkes; Editing by Sujata Rao and Toby Chopra

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