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Euro Looks Ready to Fend Off Franc and Set the Tone for Summer

ForexJun 26, 2020 06:36AM ET
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© Reuters. Euro Looks Ready to Fend Off Franc and Set the Tone for Summer

(Bloomberg) -- Option traders are stacking bets that the euro’s drop versus the Swiss franc has gone too far -- and charts seem to agree.

More than 80% of contracts that changed hands since Monday were aimed at a stronger euro, data from the Depository Trust & Clearing Corporation show. That contrasts with the trend seen earlier in June, when demand for bullish and bearish options were more balanced.

Europe’s shared currency is heading for a third weekly drop against the franc -- a favorite of haven seekers during bouts of risk aversion -- on concern about a second wave of Covid-19 infections and the threat of a global trade war. A chart pattern now in the making, known as the inverted hammer, suggests that the trend is about to reverse.

A decisive euro rebound against the Swiss currency could be a sign of global market mood over the coming months -- one where the typical summer lull tempers any sentiment upheavals fueled by pandemic and economic headlines.

This week’s euro-bullish transactions in options went through amid an overall slowdown in trading flows -- and that’s significant.

The drop in volumes suggests investors see a smaller chance of market turmoil into the summer -- which would work against a haven asset such as the franc. This is also reflected in a slump in appetite for options that pay out on large moves, with a one-week demand gauge having fallen to the lowest since early March and below its past-year average.

The euro was little changed Friday around 1.0637 versus the franc in relatively quiet trading, largely dominated by quarter-end flows. Should it stay near these levels, technicals will support views for a rebound in the common currency.

The pair is about to complete a bullish pattern on the weekly chart. This points to a reversal and suggests that the latest drop was just a correction of the sharp rally seen between May 18 and June 5.

Such a formation has been seen only once since the Swiss National Bank removed the 1.20 exchange-rate floor in 2015 -- and the euro rose by more than 4% within two months after that.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

 

Euro Looks Ready to Fend Off Franc and Set the Tone for Summer
 

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