World's Biggest FX Trade Is in Tightest Range Ever

(Bloomberg) -- The world's most actively traded foreign-exchange pair is on track to post its tightest quarterly range since the inception of the euro two decades ago.

The euro-dollar cross, which sees roughly $1.25 trillion of transactions a day, has traded in a 3.4-U.S. cent range since the beginning of 2019. With turbulence in developed-nation currencies at the lowest level in over a year, strategists at Goldman Sachs Group Inc. and Societe Generale SA don't expect it to break out anytime soon.

Euro-dollar volatility has crumbled in part due to slowing growth on both sides of the Atlantic, according to Goldman's Zach Pandl. That's spurred both the Federal Reserve and European Central Bank to preach caution around their future monetary policy paths. While he foresees Europe's economic data stabilizing before America's, Pandl says the FX stalemate is likely to persist for the next several months.

“The two economies at the moment are more similar than they are different -- they're both seeing weak growth and dovish shifts from the central banks,” said Pandl, the firm's co-head of global currency and emerging-market strategy. “Ultimately, we think the euro picture picking up breaks that range, but it's been going nowhere fast for several months running.”

The euro was trading at about $1.1383 on Thursday in New York, close to the middle of the $1.1234 to $1.1570 band that it's been confined to since Jan. 1. Pandl predicts the pair will shake off the torpor with a climb to $1.17 in three months as the U.S. economy decelerates more quickly than that of Europe.

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SocGen strategist Kit Juckes agrees. He forecasts the euro will climb to $1.20 by the end of December -- but it'll be a grind to get there. The Fed's recent dovish policy pivot has prompted markets to dial back any remaining U.S. rate-hike wagers, while ECB tightening expectations remain low.

“The first piece of the recipe for low vol is low, steady rates,” Juckes said. “You have the G-3 central banks on hold and you have reassurance that in this brave new world, the peak level of rates is a lot lower than your worst nightmare.”

Benchmark 10-year Treasury yields have swung just 11.6 basis points in February, on pace for the smallest monthly range over the past two decades. That's helped push volatility in Group-of-Seven currencies to the lowest since January 2018, according to a JPMorgan Chase & Co. gauge based on three-month at-the-money forward options.

Of course, the tranquility can't last indefinitely. A favorable breakthrough in ongoing Brexit negotiations could see the euro follow the pound higher, while the swelling U.S. budget deficit will eventually erode the already “expensive” dollar's appeal, according to Juckes. But volatility is likely to dive even further before turbulence returns to currencies, he said.

“I'm never going to forecast low vol forever, but right now, it feels to me as if vol is going to get squeezed a bit further,” Juckes said. “I can see things that will be vol-inducing -- I just can't see them today.”

--With assistance from Elizabeth Stanton.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Boris Korby, Mark Tannenbaum

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