FXStreet (Guatemala) - Team BAML explained that their forecast for EUR/USD at year end is 1.30, a move of less than 5%.



Key Quotes



" This seems eminently achievable (25% of FX forecasters agree), but options imply only a 10% probability that it will occur."



"This probability seems very low yet by most measures the options are fair or even expensive so how can this be? This simple example illustrates how extreme low volatility creates a disconnect between perception and pricing of what constitutes a tail event."



"This phenomenon is particularly pronounced for currencies because they are a low volatility asset class. Currencies are not historically close to equilibrium levels, so that the size of adjustments that a tail event would produce should be at least comparable to prior instances. Subdued global inflation suggests that a tail event is unlikely, but almost by definition tail events always seem unlikely, so how can we prepare in the most cost efficient manner?"



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