--Risk reversals show euro fears are back
--But jitters are limited and euro-specific
--Standard Life, others making risky currency bets
vol up, negative bets increases, more hedging, 引力 effect!
By Neil Shah
Of THE WALL STREET JOURNAL
NEW YORK (Dow Jones)--Currency traders are bracing for volatility after China raised interest rates and Moody's Investors Service downgraded Portugal's rating to junk status, but bets in the foreign-exchange derivatives market show they are less panicky than last month and still willing to take risks.
A widely-watched gauge of expected volatility in the euro/dollar exchange rate, based on options prices, jumped a sizeable 4% Wednesday. A key measure of euro fears, called the "risk reversal," rose to 2.365 from 2.175, signaling investors fear a sudden collapse in the euro.
Yet similar readings for other global exchange rates haven't budged that much. And the euro-dollar "risk reversal" remains below the 3 mark seen last month before Greece's parliament calmed world markets by passing budget cuts needed to get additional international assistance and avoid a debt default.
Other financial markets point to calm too. The euro has dropped 0.7% against the dollar to just above $1.43 Wednesday, yet the Australian dollar, which is highly sensitive to news about China -- a big trading partner -- hasn't suffered.
Investors have dumped Portuguese bonds and the cost of insuring against a Portuguese, Spanish, Irish and Italian default has leaped, prompting "one of the worst days on record for the sovereign" credit-default swaps market, according to data provider Markit. Yet there are few signs of trouble in the international bank-funding markets. The Dow Jones industrial average was up 0.4%.
"This is a euro phenomenon," said Ron Leven, currency strategist at Morgan Stanley in New York. In addition, euro-related volatility levels are "higher today but still well below the highs for the year seen late last month."
Two factors unnerved investors. First, Moody's Tuesday slashed Portugal's sovereign-debt rating to "junk," forcing investors with strict guidelines to dump holdings.
Making things worse, China's central bank raised key interest rates to curb high inflation, fueling fears that a slowdown in the world's second-biggest economy could hamper growth worldwide.
Still, forex traders aren't giving up on risky trades yet, especially with Thursday's European Central Bank's interest-rate-setting meeting and the U.S. Labor Department's June employment report due Friday.
Standard Life Investments of Edinburgh, which manages some $240 billion of assets, "just initiated" a "short euro, long Norwegian krone position" to support its bearish long-term outlook on the euro, according to an email sent on Wednesday.
Another example of a risky trade: after weeks where investors bought options to insure themselves against a euro collapse, some are selling this insurance to others, a trader at a major bank says.
Now that Europe and the International Monetary Fund have given Greece enough cash to pay debts until September, traders this week are willing to wager the euro won't collapse in the near-term, this source said.
-By Neil Shah, The Wall Street Journal; 212-416-2619; neil.shah@wsj.com
