Jackson Hole Meeting Risks Fueling Euro, Aussie Rallies

(Bloomberg) -- Heading into Jackson Hole, options pricing shows traders are positioning for the euro and the Australian dollar to do more than just weather policy tweaks -- they’re wagering the two will extend their strongest rallies this decade.

Contracts on each currency versus the greenback show the market is much more fearful of gains than losses. That underscores the strong bullish bias that has come to the fore this year -- driven for the euro by prospects that quantitative easing will be reduced, while for the Aussie the optimism has come as commodities prices recovered and swaps markets priced out the chance of policy makers Down Under cutting interest rates.

Risk-reversals for three month contracts on the Australian dollar are climbing for a second week and have recovered almost half the drop from the -0.4975 July 27 peak down to the -1.2550 low on Aug. 14. Despite further iron ore price increases over that time, the spot exchange rate for the Aussie has lagged amid disappointing data on consumer prices and jobs.

Pullbacks have been limited, given that fund-related interest to buy the Aussie is now positioned adjacent to bids from the largest exporters down to the July 18 low of 77.86 U.S. cents, according to Asia-based currency traders who declined to be identified because they aren’t authorized to comment publicly. Leveraged investors have piled in to bets on the currency for 10 straight weeks, accumulating the largest net long Aussie position since 2013.

Similar contracts show euro bulls have plenty of reason to be excited over the next few days, especially if European Central Bank chief Mario Draghi fails to address the single currency’s elevated levels in his speech Friday. It will also be a challenge to dampen the presence at Jackson Hole of Bundesbank President Jens Weidman, a known hawk. In a speech Wednesday, Weidman stated his preference for a quick, orderly exit from the ECB’s asset purchase program.

Meanwhile, there is also a cabal of investors who see Jackson Hole as an opportunity for the dollar to revive, despite its longest monthly losing streak in six years.

Still, three-month euro-dollar risk-reversals haven’t been this slanted to the upside since 2009, when the greenback was slumping as the Federal Reserve unleashed massive bond buying. Indeed, risk-reversals have surged beyond the levels reached back in early 2016, before Draghi expanded bond purchases.

Through all this, traders still have a bias for calls over puts as drama at the White House and divisions at the Fed about whether inflation will reach target levels keep the reserve currency on the back foot. As a consequence, both Aussie and euro appear standouts in beating performance forecasts into the third quarter.

The euro’s 12 percent gain this year is its best-ever rally through Aug. 24. The next-best advance under the same time-frame at this stage came in 2002, at the start of the shared-currency’s record three-year rally that saw it surge more than 50 percent through to the end of 2004.

To contact the reporter on this story: Michael G. Wilson in Sydney at mwilson176@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Garfield Reynolds, Emma O'Brien