Stock Market

Euro pauses at parity. But what comes next? – News Opener

In markets, big round numbers attract. But they often also provide support and offer resistance.

So after powering towards 1.00 early on Tuesday, the euro/dollar
EURUSD,
+0.01%

rate came to a juddering halt, unable to meaningfully breach parity.

As economists speculated whether relative economic and monetary policy differences In the U.S. and eurozone would continue the trend, observers of a more technical bent focused on reading the market plumbing.

“There is nothing economically significant about EUR/USD reaching parity,” said George Saravelos, analyst at Deutsche Bank. “However, the psychological impact is clearly important and investors are going to be very focused on market technicals, flows and liquidity as and if we break the level.”

Forex traders usually reckon that the more significant a milestone, the more likely there will be a fat batch of stop-loss orders and other instructions poised to be activated if it is breached. These scenarios can often trigger sharp moves as orders predominantly in the same direction cascade through the market.

But Saravelos said that such market gamma, which refers to whether option market makers are likely to be forced to sell or buy as the euro drops, does not show an unusual risk profile around parity. “The overall gamma profile is neutral,” he added.

It might be expected that as the euro stumbled to parity more traders would place bets on it falling further. Yet here, too, positioning is not at all extreme.

U.S. data published at the end of last week showed hedge funds were net short only about 9,500 contracts on the euro/dollar. In October last year the market was net short more than 60,000 contracts. At the time the euro/dollar was about $1.16.

Euro FX CME futures contracts held by managed funds


FactSet

“Bringing it all together, there is nothing unusual or extreme from either a market positioning or flow perspective with EUR/USD at parity. More worrying, however, is the absence of market depth with liquidity conditions having significantly deteriorated in recent weeks,” Saravelos continued.

“Effectively, market participation has declined significantly. This has the greatest potential to generate disorderly price action in the coming days as large flows in the market have the potential to generate bigger moves in the exchange rate.”

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