The euro’s demise has been a popular topic in the media for many years now. Talk of a breakup of the eurozone, a continent-wide banking crisis, and continued political issues in the periphery have still not been resolved. Asset markets in Europe have generally underperformed American assets. But the currency itself has hardly moved versus the US dollar in the past four years. In fact, it’s essentially in the same spot (1.30) that it was exactly four years ago.
Over the past 15 months of price action, the currency pair has been even less volatile than usual, as the volatility of asset classes globally has declined. Here is the chart since the start of 2012:
Click to enlarge
The low has been around 1.20 and the high has been around 1.37, which is a relatively tight range given the headline barrage in that period. I’ve been of the opinion that the euro is eventually going lower based on the straightjacket of the current monetary system and the massive capital needs of the broader European banking sector.
Yet it’s been much ado about nothing. In fact, the implied volatility of this currency cross is at levels not seen since 2007. Though that’s more understandable for an asset like the SPX
(INDEXSP:.INX), which has rallied back to its 2007 highs, the euro is still much below its 2007 levels, and the structural situation is much more impaired today. But the cross has not moved much, so option buyers are not around.
Nevertheless, the price structure of the euro in the spring of 2013 resembles its 2012 counterpart. If the currency continues to follow last year’s squiggles, then it could be in for a relatively sharp descent over the next couple months.
This item by Enis Taner was originally published on RiskReversal.com
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