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The USD index is only a modest 0.4% stronger and EURUSD -0.8% weaker, both still within ranges since October, and only six currencies have moved more than 1.5% against the dollar. If the Euro area disappoints sufficiently, this anti-cyclical appreciation in the dollar might also extend to another leg down in EURUSD (our 1Q'19 forecast of 1.11 already allows for a certain probability of this).
On a broader perspective, we view EURUSD’s seesaw sentiments on either side in especially the short-run, but at 1.12-1.08 as a major support region and the ideal area for a long-term higher low over the 1.0340 lows set in 2016.
FX Derivatives Strategy (EURUSD): Options Strips
Combination ratio: (2:1), spot reference: 1.1384
Rationale: You could easily make out that EURUSD skews have been well-balanced on either side in 1m tenors that signifies hedgers interest in both OTM put and OTM call options. Whereas the bid for OTM puts of 3m tenors signal extreme bearish risks.
To substantiate these indications, the RRs for negative bids in the 3m and neutral numbers for 1m tenors also indicate us directional trading strategies.
Contemplating the prevailing bearish technical environment (in long-term) and most importantly, the positively skewed IVs in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with the bearish risk reversal numbers.
The execution: Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 3M tenors, go long 1m at the money +0.51 delta call option simultaneously.
The strategy can be executed at net debit with a view to arresting FX risks on both sides and likely to derive exponential returns but with more potential on the downside.
Alternatively, shorting futures of mid-month tenors are advocated with a view of arresting further potential slumps. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.
Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -31 levels (which is mildly bearish), while hourly USD spot index was at 37 (mildly bullish) while articulating (at 10:41 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
