The euro is shaping to be the biggest casualty of Switzerland’s decision to scrap its currency cap.
Soon after the Swiss National Bank unexpectedly ended its three-year policy of keeping the franc weaker than 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc yesterday, the euro also plunged 3.5 percent against a basket of 10 developed-nation peers, the most since its 1999 debut, and reached an 11-year low against the dollar today.
The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs Group Inc. to Pacific Investment Management Co., the world’s biggest manager of active bond funds, have in recent days talked about the euro falling to parity with the dollar, a 14 percent decline from its current level.
The difference in the cost of options to sell the euro against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday, and extended its advance today to the highest since August 2012.
The euro also sank below parity with the franc yesterday to an all-time low of 85.17 centimes, recovering to 98.88 today.
In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($202 billion) since September 2011. Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers.
“The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end. When one of the biggest buyers of euros “leaves the building,” losses are inevitable, he said.
Options traders appear to agree. The premium on three-month contracts to sell the euro versus the dollar, over those to buy, rose 0.4 percentage point in the wake of the SNB announcement and another 0.5 percentage point today.
That took the cost premium to 2.17 percentage points, 25-delta risk-reversal data compiled by Bloomberg show. Yesterday’s jump was the biggest one-day increase since February 2013.
The shared currency’s next-biggest daily decline was a drop of 1.6 percent on Jan. 5, 2009, when the dollar surged as details emerged of a U.S. fiscal stimulus plan to tackle the global financial crisis. The franc jumped 21 percent against the basket yesterday as policy makers removed the euro cap.
So, is it a good time to buy properties in Europe??
will tell you how to become rich. Close the doors. Be fearful when
others are greedy. Be greedy when others are fearful.” – Warren Buffett