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In this write-up, we run you through the bearish euro trade perspectives after the European Central Bank held its benchmark refinancing rate at 0 percent during its April meeting and reiterated it expects key interest rates to remain at record low levels at least through the end of 2019, amid global growth concerns.
Stay short EURCHF in cash. Keep 3-month EURUSD put.
Stay long a 3m EURJPY put funded by a 3m USDJPY put (roll strike).
While the potential stabilization out of China and modest improvements in the composite Euro area PMIs are on margin slightly constructive for EUR, the region is still the laggard from a global standpoint on growth and stabilization of various growth metrics is at a nascent stage. Our growth forecast for the Euro area has been stable for just three months (EM has been stable for five).
Moreover, the surprisingly-large drop in core inflation (0.2% miss) highlights risks surrounding the ECB’s rate guidance, especially when taken in the context of an ECB that is arguably undershooting its inflation mandate and is considering shifting to a tiered-rate system that could drive interest rates further into negative territory. The ECB meets next week and may provide further insight into this.
Cyclical headwinds to the euro thus keep us bearish on the currency on the crosses (JPY, CHF) and the dollar. Nonetheless, the risk of further improvement in regional data can’t be ruled out.
Hence, only one of our recommended trades ‘EURCHF’ is expressed outright. The other two are via options. EURUSD is through a long put and hence limited loss. Our bearish EURJPY exposure was partly funded via and USDJPY put which we restrike to a higher level (from 108.50 to 110.00) to take in more premium. The BoJ will be in focus next week and we expect them to follow in the footsteps of other DM central banks and turn more dovish, which should still be conducive of selling USDJPY downside
Trade tips:
Hold a 3m EUR put/USD call, strike 1.10, for 35bp. Marked at 0.25%
Hold a 3m EUR put/JPY call, strike 121.50 and sell a 3m USD put/JPY call, strike 108.50. The total net premium received of 24bp.
Hold short EURCHF at 1.1244 with a stop at 1.1469. Marked at 0.03%. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly EUR spot index has shown 77 (bullish), while USD is flashing at -92 (bearish), JPY is at 77 (bullish) and CHF is at -88 (bearish), while articulating at 12:08 GMT.
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
