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EUR/USD risk reversals drop to three-year low, point to more pain

  • The options market is most bearish on EUR/USD in three years. 
  • Potential risk reset could weaken demand for the American dollar, helping EUR/USD to regain some poise.

One-month risk reversals on EUR/USD, a gauge of calls to puts, plunged to their lowest level since April 2017, indicating increased demand for put options on the common currency. 

A put option gives the holder a right but not the obligation to sell the underlying asset at an agreed price on or before a particular date. 

The slide in the risk reversals, therefore, indicates the investors are rushing to add downside bets (put options) to protect themselves from a deeper drop in EUR/USD. 

The currency pair fell to 1.0653 on Thursday, the lowest level since April 2017, as investors sold everything, even safe havens like Japan's yen and Swiss francs, to move their money into dollars over fears of a coronavirus-led recession in the global economy. 

At press time, the EUR/USD pair is trading near 1.0735, representing a 0.40% gain on the day. China surprisingly held rates steady early Friday, even so, the Asian equities managed to put in a positive performance. 

If the risk reset gathers traction in Europe, the dollar will likely come under pressure, allowing EUR/USD to extend the recovery seen in the Asian session. 

On the data front, the focus is on Germany's Producer Price Index for February and the Eurozone Current Account data for January. Across the pond, the US will release Existing Home Sales for February at 14:00 GMT. 

Risk reversals

Technical levels

 

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