A wall of derivatives bets is keeping the euro from hitting parity with the dollar for the first time in two decades, because of a wall of derivatives bets.
After the shared currency fell to within a whisker of a pure one-for-one rate, traders decided to stop those options contracts from being triggered by a last-ditch push on Tuesday. It's a border that could collapse if new concerns over Russian natural gas supplies or signs of a more hawkish Federal Reserve drive the euro lower.
Since the euro fell below the $1.05 level, data from the Depository Trust Clearing Corporation shows that parity has become the most traded option in the currency. That means that many traders have motivation to defend the level, with Tuesday s price action being a textbook case of barrier protection.
Neil Jones, head of foreign-exchange sales at Mizuho, said that there is a large queue of buy orders at 1.00 stand in place in the market looking to reduce short exposure via spot or option structures.
According to the data from the DTCC, a total amount of 180 billion euro $181 billion has been traded for euro vanilla put options over the past month. Over 12 billion euros are the people with a strike at parity that hasn't expired as of Tuesday. A large portion of the currency derivatives market is over-the-counter transactions where data isn't available, so this number is just a fraction of the actual exposure.
The popularity of the parity strike in publicly-reported deals shows how it can mean the difference between a profit or a loss for traders.
The euro fell to $1.00003 at 11: 46 a.m. in Frankfurt after a slow descent, its lowest since 2002, according to pricing sourced by Bloomberg. The rebound came when it abruptly reversed its losses to trade as high as $1.00688. Some pricing providers showed it briefly hit parity, leading some to debate whether the level had gone.
In February, the euro was trading around $1.15 and the downward spiral has been rapid. A series of increasingly large Federal Reserve interest-rate hikes has boosted the dollar, while Russia's invasion of Ukraine has worsened the outlook for the euro zone and pushed up the cost of the region's energy imports.
Brad Bechtel, foreign exchange strategist at Jefferies LLC, said the euro-dollar pair traded as close to parity as you can get without trading it. The selling pressure is unlikely to abate for now, although we should see a good amount of profit-taking around these levels which may support the pair for a bit. None of the US plan to turn Israel's Tech Industry Against China is working.