Currency Traders Are Ditching Dollar for Euro on Option Bets

Forex

Summary:

Traders are shifting from the dollar to the euro in currency options, citing U.S. policy risks and trade tensions. The euro is gaining safe-haven appeal, outperforming the dollar amid rising European optimism.

The euro is taking on a bigger role in the global currency options market as traders skirt around the dollar given the risks from unpredictable US policy and a global trade war.

There’s been a shift in trading volumes. Around 15% to 30% of contracts tied to the dollar versus major currencies were switched to the euro, looking at data from the Depository Trust & Clearing Corporation for the first five months of this year versus the final five months of 2024. There are also signs the euro is being used as a haven — traditionally the dollar’s role — and for bets on big moves.

While deals involving the dollar still dominate in the $7.5 trillion-a-day currency market, this could be early evidence that the greenback is facing greater competition as the world’s reserve currency. Traders are sidestepping the dollar after its biggest slump in years, with Europe’s common currency looking like a key beneficiary as the region’s markets seize on billions in government stimulus spending.

“If we’re moving to an environment in which the European flow story is more important, then we could be moving to an environment in which it’s euro pairs which are driving everything,” said Oliver Brennan, options strategist at BNP Paribas SA.

The growing optimism toward European assets is also seen in the stock market. Wall Street strategists expect loosening monetary policy and increased government spending to boost the Stoxx Europe 600 Index by 3% by the end of the year, handing investors annual returns of about 10%, according to a survey conducted by Bloomberg.

The euro, in the meantime, has rallied 11% against the dollar so far this year, hitting its highest since 2021 at above $1.16. The dollar has slid against every major currency, with a gauge down over 7% to its lowest since 2022. That’s undermining trust in US assets.

And the slump may not be over yet. Hedge fund heavyweight Paul Tudor Jones just predicted another 10% drop for the dollar over the next year. Risk reversals, a gauge of options sentiment, are becoming increasingly negative on the dollar against the yen, whereas they are turning less bearish on euro-yen — a “really important signal” on the euro for Brennan.

As markets question the dollar’s stability, implied volatility in the euro against the yen is looking the calmest in nearly four years relative to swings between the greenback and Japanese currency.

“The market is thinking that dollar-yen will be more volatile than euro-yen in a negative market shock, which is the opposite to how the market has traded these events in the past,” said Brennan. “If that’s the thinking, then it means the market sees the euro as more of a safe haven than the dollar.”

The cost of options is also a driver, said Ben Ford, currency strategist at Macro Hive. While implied volatility generally has eased after spiking in April’s market chaos, it stands at nearly 11% over three months for dollar-yen, compared with under 9% for euro-yen.

“The market is finding cheaper ways to express its view, especially given the view is probably for euro outperformance,” Ford said.

Traders also seem to be favoring the euro over the dollar when it comes to hedging or betting on big directional moves on the yen. That’s evident in so-called 10-delta fly spreads, a gauge of demand for outsized swings, where the gap between euro-yen and dollar-yen has been steadily widening since April.

Of course, the dollar has been written off many times before. Just at the start of this year, the euro was languishing near parity with the greenback, with many investors certain the common currency’s value would fall below its US peer.

Instead Trump’s April’s tariff announcements saw investors dump dollar assets. While US stocks have recovered since then, the dollar risk premium remains elevated, and it may require a return to US exceptionalism to reverse the trend, according to Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence.

Meanwhile the European Central Bank’s President Christine Lagarde has called on policymakers to seize the moment and increase the euro’s global profile. French officials were also reported to be lobbying for additional measures aiming at raising the currency’s importance.

“There’s a push and a pull — the pull has been that there’s potentially more safe assets to buy in Europe and more growth expectations in Europe,” said BNP’s Brennan. “And the push has been tariff uncertainty, risks to US exceptionalism, and the macro story.”

Source: Bloomberg

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Michelle

Forex

Economic

China’s export engines continue to defy President Donald Trump’s tariff campaign. But more worryingly for policy makers in Beijing, the years-long property slump may be worsening again, with no end in sight.

With trade tensions stealing the headlines, the latest deterioration in China’s property market has been somewhat overshadowed. But not in Beijing’s policy circles: At a State Council meeting last Friday, Premier Li Qiang pledged action to make the real estate market “stop declining.”

QuickTake: A Guide to Trade Talks, Trump-Style

Days later, data showed China’s new-home prices fell the most in seven months in May and residential sales by value declined 6.1% from an already low base a year earlier. Real estate investment saw a deepening decline, slumping 12%.

Bloomberg Economics’s property dashboard shows the deterioration:

Economists at UBS including Wang Tao expect that ongoing weakness will prompt more policy support in the second half, including a 20 to 30 basis point cut in the key policy rate and additional fiscal stimulus equating to 0.5-1 percentage point of GDP.

There are some glimmers of good news: Government purchases of homes continued to help clear some excess inventory. As of May, Bloomberg Economics estimates show it will take 5.24 years to absorb unsold floor space, down marginally from 5.26 years in April. This extended a gradual trend down from a peak of 5.6 years in the third quarter of 2024.

That’s still a multi-year cloud hanging over the world’s second-largest economy.

Economists at ANZ Research see a structural transformation in property over the next decade as the market transforms from one led by construction to one led by services.

Construction Slump

Senior China Strategist Zhaopeng Xing forecasts property construction will decline another 30% by 2035, with more than 50% of new demand stemming from upgrading, instead of urbanization. That’ll make rent rather than prices crucial to stabilizing the sector as migrant workers and university graduates fuel rental demand.

The long-term takeaway: The overall importance of property to China’s economy will continue to decline, and as such there will be no big stimulus to support it. “The decrease of construction activities will be irreversible,” Xing wrote in a recent note. “Policy focus will be on destocking and affordability going forward.”

But for now, the two-speed growth model of strength in exports and weakness in property continues. Macquarie’s Larry Hu says the balance between those two key growth drivers will shape policy outcomes for the rest of the year:

More money doesn’t always mean better outcomes, especially when it’s chasing the wrong target, according to Luci Ellis, who was previously the chief economist at the Reserve Bank of Australia, referring to Trump’s call for countries around the world to boost military spending to above 2% of GDP.

Once a metric becomes a target, it can stop being useful and history offers plenty of examples: call centers chasing volume over resolution or companies focused on the number of sales calls, rather than actual sales or profits. And defense is no exception, said Ellis who is now the chief economist at Westpac, one of Australia’s four largest banks.

Building bases in the wrong places or buying overpriced gear won’t improve national security. The opportunity cost — what else could be done with that money — is the better lens. For example, critical investments in battery tech or drone industries may not count as “defense,” but could matter far more for security, Ellis said.

“If I were appointed national security advisor for a day, among my first priorities would be to massively fund university research into alternative battery and magnet technologies that do not rely on rare-earth metals for which single countries dominate supply, as well as research into cleaner processing of those minerals. That would not even count as defense spending,” Ellis said. “My other initial priority – fostering a domestic drone industry, including design, manufacturing and operation – would probably also not count as defense spending.”

Increased military spending need not translate one-for-one into higher military spending, let alone larger deficits as governments will try to find savings and trade-offs elsewhere, she said. But to the extent that it does boost government borrowing, this has implications for bond markets, for the global level of yields and for the size and shape of private investment.

Source: Bloomberg Europe

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Adam

Economic

Middle East Situation

Oil prices retreat from recent highs

Brent crude oil fell 2.1% to $77.23 per barrel on Friday as immediate fears of US military intervention in the Middle East subsided. The decline came after President Trump announced he would delay any decision on striking Iran for at least two weeks.

Despite Friday's retreat, oil remains on track for a 4% weekly gain, marking the third consecutive week of increases. The previous week saw an almost 12% surge as tensions between Israel and Iran escalated dramatically.

The temporary reprieve may create space for diplomatic negotiations, though underlying supply concerns persist. The situation remains fluid with both Israel and Iran exchanging missile strikes throughout the week-long conflict.

Asian markets show mixed performance across regions

The MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.7%, driven primarily by Hong Kong's Hang Seng index, which jumped 1.2%. However, the index remains down 0.4% for the week, reflecting ongoing uncertainty.

South Korea's benchmark outperformed with a 1.1% rise, breaking above the psychologically important 3,000 level for the first time since early 2022. The surge followed newly elected President Lee Jae Myung's announcement of a stimulus spending plan.

Japan's Nikkei 225 closed flat despite core inflation hitting a two-year high in May at 2.8%. The inflation data keeps pressure on the Bank of Japan (BoJ) to resume interest rate hikes, though investors don't expect action until December.

China's markets showed resilience with modest gains, supported by the central bank's decision to keep benchmark lending rates unchanged as expected. The stability in Chinese monetary policy provided some reassurance to regional investors.

US futures weaken despite holiday closure

US equity markets were closed for the Juneteenth holiday, providing little direction for Asian trading sessions. However, futures contracts suggested a cautious tone, with both Nasdaq 100 and S&P 500 futures declining 0.2% during Asian hours.

The subdued futures performance highlighted investor nervousness despite the temporary reprieve on Iran military action. Markets appeared to be taking a wait-and-see approach ahead of the resumption of full US trading.

Central banks deliver dovish surprises globally

Several central banks caught markets off guard with unexpectedly dovish moves overnight. Norway's central bank delivered its first rate cut since 2020, surprising analysts who expected rates to remain steady.

The Swiss National Bank (SNB) reduced rates to zero and didn't rule out moving into negative territory if economic conditions deteriorate further. This marked a significant shift in policy stance as global growth concerns mount.

The Bank of England (BoE) held rates steady but signalled potential for further easing measures. Governor Andrew Bailey indicated the central bank sees a need for additional monetary support as economic headwinds persist.

Currency markets react to shifting sentiment

The US dollar weakened against major peers as safe-haven demand eased following Trump's decision to delay military action. The euro gained 0.3% to $1.1527, while the pound rose 0.2% to $1.3494.

Despite Friday's weakness, the greenback remains set for a 0.5% weekly gain driven by safe-haven flows during the height of Middle East tensions. However, many analysts expect the dollar's recent strength to fade if geopolitical risks continue to subside.

The British pound's modest gains came despite the BoE's dovish commentary, suggesting traders are focusing more on global risk sentiment than domestic monetary policy. Sterling remains vulnerable to further weakness if global tensions escalate again.

What this means for traders

The temporary easing of geopolitical tensions provides a brief respite for markets, but underlying risks remain elevated. Traders should prepare for continued volatility as the situation in the Middle East remains unresolved.

The two-week timeline announced by Trump mirrors his approach to other major decisions, including trade negotiations. This pattern suggests markets may see periodic relief rallies followed by renewed tension as deadlines approach.

Source: ig

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Warren Takunda

Economic

Middle East Situation

Confidence among UK consumers has improved but remains fragile in the face of expected petrol price rises amid escalating conflict in the Middle East, according to a leading index.

The latest snapshot from the data company GfK says sentiment improved by two points in June but remained in negative territory at -18, well below the -12 of a year ago. A reading above zero indicates optimism; below indicates pessimism.

The last time the headline index, which is closely watched by the government and the Bank of England, was positive was in January 2016, when it was at 4. It has had double-digit negative readings since September 2021 when Britain was in the grip of Covid-19.

Last month, sentiment hit its lowest level since November 2023 as a combination of domestic tax increases, rising bills and worries over Donald Trump’s trade wars weighed on minds.

Consumers became more optimistic about the overall economy this month, with scores up three points when judging how the past year went, and up by five points when looking at the next 12 months. However, both measures were firmly stuck in negative territory, at -43 and -28 respectively.

Assessments of personal financial situations were unchanged, with the score for the past 12 months at -7 and the measure looking ahead was in positive territory, at 2.

Neil Bellamy, consumer insights director at GfK, said: “Consumers have been resolute in their views on their wallets, with June’s personal financial situation scores (past and future) unchanged from May. Yet confidence is still fragile because the dark shadow of inflation is a day-to-day challenge for so many of us.”

The cost of filling up a car started creeping up this week when crude oil prices rose sharply after Israel’s attack on Iran. A litre of petrol now costs 132.8p while diesel is at 138.9p, according to the AA motoring group.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “Looking ahead, consumer confidence will likely be squeezed by gradually easing wage growth while inflation remains at about 3.5% for the rest of the year, and unemployment will likely creep up.

“The prospect of tax increases in the October budget could also weigh on households. But real income should continue eking out gains given that average earnings rose 5.5% year-over-year in March. We also expect unemployment to rise only modestly to a peak of 4.9%.”

Gen Z is driving improvements in confidence, with younger generations the most optimistic about the future, a separate survey from the British Retail Consortium showed on Thursday. Consumer sentiment improved for the second month in a row to the highest level since Christmas but remained in negative territory.

“This rising optimism may also reflect the increase in minimum wage from April, with many younger people expected to have seen a significant uplift in their pay packet,” said Helen Dickinson, the BRC’s chief executive. “Expectations of future spending – both in retail and more generally – rose slightly, with more spending on groceries planned over the coming months.”

Source: Theguardian

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Adam

Commodity

Middle East Situation

Stock markets ticked higher on Friday while oil skirted close to its biggest daily drop since April after President Donald Trump pushed back a decision on U.S. military involvement in the Israel-Iran conflict.

Rising risks from the Middle East have loomed large on the world's top indexes again this week.

Europe's main bourses all rose between 0.5%-1% after similar gains across Asia (.MIAPJ0000PUS), opens new tab, although it was touch and go whether it would be enough to prevent a second straight weekly loss for MSCI's main world index. (.MIWD00000PUS)

Israel bombed targets in Iran, and Iran fired missiles at Israel overnight as the week-old war continued although Friday's markets moves, which also included a modest drop in the dollar, showed an element of relief.

That was largely pinned on Thursday's statement from the White House that Trump will decide in the next two weeks - rather than right away - whether the U.S. will get involved in the war.

European foreign ministers were to meet their Iranian counterpart in Geneva on Friday, seeking a path back to diplomacy over its contested nuclear programme.

The relief the U.S. wasn't charging into the conflict sent oil prices down as low as $76.10 per barrel, although they were last at just over $77 and still up 4% for the week and 20% for the month.

"Brent crude is down 2.5% today in the clearest sign that fears over an imminent escalation in the Israel/Iran conflict have eased," MUFG strategist Derek Halpenny said.

Gold, another traditional safe-haven play for traders, was also lower on the day although Nasdaq , S&P 500 , and Dow futures were all in the red after U.S. markets had been closed on Thursday.

Asian shares (.MIAPJ0000PUS) , had gained 0.5% overnight thanks to a 1.2% jump in Hong Kong's Hang Seng and as newly elected President Lee Jae Myung's stimulus plans saw South Korea's Kospi (.KS11), top 3,000 points for the first time since early 2022.

China's central bank held its benchmark lending rates steady as widely expected in Beijing, while data from Japan showed core inflation there hit a two-year high in May, keeping pressure on the Bank of Japan to resume interest rate hikes.

That in turn lifted the yen and pushed down the export-heavy Nikkei (.N225), in Tokyo.

OIL RETREATS

The dollar was ending an otherwise positive week lower on the day, with the euro up 0.3% against the U.S. currency at $1.1527 and the pound 0.2% higher at $1.3494. /FRX

The U.S. bond market, which was also closed on Thursday, resumed trading with the key 10-year Treasury bond yield flat at 4.39%, while German 10-year yields , which serve as Europe's borrowing benchmark rate, fell 2.5 basis points to 2.49%.

Gold prices eased 0.5% to $3,354 an ounce, but were set for a weekly loss of 2.3%.

But the main commodity market focus remained oil. Brent crude futures were last down $1.60, or around 2.2%, at $77.28 a barrel in London although they were still on track to end the week 4% higher.

PVM analyst John Evans said the big market risk of the Middle East troubles was "unintended action that escalates the conflict and touches upon oil infrastructure".

"The world has more than adequate supply for 2025, but not if the nightmare scenario of 20 million (barrels per day) being blocked in the seas of Arabia, however briefly that might be," he said.

source :reuters

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Glendon

Forex

Economic

Retail sales in Canada rose 0.3% to $70.1 billion in April, driven largely by gains in the motor vehicle and parts subsector, according to data released Friday by Statistics Canada. Sales increased in six of nine subsectors, while retail e-commerce climbed 3.6%.

The rebound also translated into a 0.5% gain in volume terms, suggesting stronger real activity. Still, retailers reported mounting pressure from Canada/U.S. trade tensions, with 36% citing issues such as higher prices, supply chain disruptions, and weaker demand.

Motor vehicle and parts dealers led the monthly increase, up 1.9%, as both new and used car sales posted gains exceeding 2%. By contrast, sales at gasoline stations fell 2.7%, although volume-adjusted figures rose slightly by 0.4%.Core retail sales—which exclude autos and gasoline—edged up just 0.1%, pointing to subdued discretionary spending. The biggest drag came from clothing and accessory stores, down 2.2%, offsetting modest gains in sporting goods, electronics, and grocery categories.

Regionally, five of ten provinces posted growth. British Columbia led with a 1.7% increase, bolstered by strong auto sales in the Vancouver area. Ontario rose 0.2% overall, though Toronto saw a stronger 2.7% gain. New Brunswick (NYSE:BC) recorded the steepest drop at 3.1%, weighed down by auto-related weakness.

Despite April’s improvement, preliminary data for May suggest a potential pullback. Early estimates point to a 1.1% decline in retail sales, based on 53.8% of survey responses. While subject to revision, the data signal a soft start to the summer for Canada’s retail sector.

Source: Investing

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Warren Takunda

Economic

The prime minister of New Zealand stressed the mutual benefits of trade with China in a meeting with Chinese leader Xi Jinping on Friday, while acknowledging their disagreements on geopolitical issues.

Christopher Luxon, on his first visit to China since becoming prime minister in late 2023, flew to Beijing after two days of meetings with officials and business leaders in Shanghai, China’s commercial center.

He wants to maintain healthy trade ties despite differences over regional and global security issues and China’s growing divide with the United States. China is an important market for New Zealand food, dairy and other exports.

Xi told Luxon that the two countries should seek common ground while setting aside their differences, Chinese state broadcaster CCTV said. He called for deepening trade and investment cooperation and exploring cooperation in areas such as climate.

Luxon raised the necessity of reducing tensions in the Indo-Pacific region, according to a news release from his office. He also brought up the importance of what he called “the key role” that China can play in helping to resolve global challenges such as the war in Ukraine,

“In a complex world, open dialogue is more important than ever,” Luxon said in a post about the meeting on X.

His exchange with Xi came one day after revelations that New Zealand had suspended millions of dollars in aid to the Cook Islands over concerns about the latter’s deepening ties with China.

China accounts for more than 20% of New Zealand’s exports of goods and services.

“Our trade and economic links are complementary and contribute to prosperity in both countries,” Luxon was quoted as saying in the news release.

New Zealand announced this week a limited easing of visa requirements for Chinese visitors, a major source of tourism revenue.

Luxon is headed to Europe next, where he will have meetings in Brussels and the Netherlands, his office said.

He will discuss trade, security and geopolitical issues with European Union leaders. In the Netherlands, he is an invited guest to next week’s NATO summit in The Hague.

Source: AP

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