Russia will send Europe into recession and the euro below parity

The euro will fall to dollar parity as professionals call it „non-buyable”. Nomura and BlueBay say euro shorts are a good bet.

As the European economy heads into recession, traders are becoming increasingly convinced that parity between the euro and the dollar is imminent.

Shorting the euro is one of the most popular trades in the market, and strategists from Nomura International Plc to HSBC Bank Plc have warned clients that more losses are ahead. According to Bloomberg’s options pricing model, the implied chance of the currency reaching parity against the dollar next month is about 50%.

The euro is at a 20-year low and investors are pricing the currency in the possibility that Russia could cut off gas supplies to Europe and plunge the region into recession. The economic shock will make it harder for the European Central Bank to tighten monetary policy and likely widen the interest rate differential with the US. The single currency fell further on Wednesday, trading at $1.0187.

“It’s all about Russia,” said Caspar Hense, senior portfolio manager at BlueBay Asset Management. “If we see gas rationing in Europe due to reduced supplies from Russia, we will see a significant recession in Europe. Winter can be very long.”

Hens said BlueBay has been selling euros since last month. He expects the common currency to fall to 90 cents against the dollar if Russia suspends supplies, although that is not their base case.

German officials have expressed concern that a key pipeline carrying Russian natural gas to Europe may not return to full capacity after scheduled repairs this month. The International Energy Agency warned that a complete cessation of flows „cannot be ruled out” given Russia’s „unpredictable behavior”.

Tim Brooks, head of currency options trading at market maker Optiver, expects more volatility if the euro breaks parity against the dollar. Demand for euro options is declining at lower levels of around 0.92 to 1 against the dollar, he said. Nomura International Plc strategist Jordan Rochester wrote on Tuesday that he is even more convinced that the euro will fall to 0.98 by August.

Michael Cooper

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