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We believe there are compelling macro- and micro-economic reasons for a new TLTRO, and now expect the ECB to announce a round of TLTRO funding in December or early 2019. Macroeconomic challenges are stacking up: external demand has fallen as risks related to trade, Italy, Brexit and China’s slowing growth have proliferated. As such, we see TLTRO III as an effective way for the ECB to prevent a tightening in lending conditions at a time of growing macroeconomic risks.
A new operation should be strictly targeted to deliver new loans to the private sector rather than to bond-investment or carry trades, in our view. Focusing the TLTRO on supporting the real economy should lessen any stigma that could be attached to banks’ use of the facility. The TLTRO rate could be equal to the average of the policy rates during the life of the operations – depo or refi rate – depending on whether the lending targets are met.
EURJPY IV skewness:Please be noted that the positively skewed implied volatility (IVs) of 2m tenors are signifying the hedging interests for the bearish risks. The bids for OTM puts of these tenors signal that the underlying spot FX likely to break below 124 levels so that OTM instruments would expire in-the-money. The spot may trend around those strikes as the holders of the options will aggressively hedge the underlying delta.
Risk reversals:Most importantly, to substantiate the downside risk sentiments as stated above, we see bearish neutral risk reversal numbers of EURJPY across all tenors that indicate bearish risks remain intact in the long run. While shrinking IVs that are on lower side, is interpreted as conducive for put option writers.
On data front, we have German IFO business climate, ECB president Draghi’s speech for this week. Eurozone PMIs are lacklustre, while manufacturing PMIs have dipped from previous 52.0 to the current 51.5 levels, while service PMIs have also been slashed from 53.7 levels to the current 53.1 levels. These are leading indicators of economic health - businesses reactions to the prevailing market circumstances.
Options Trade Tips (EURJPY):
Contemplating all the above aspects, we advocate buying 2m EURJPY ATM -0.49 delta puts for aggressive bears on the hedging grounds. If expiry is not near, delta movement wouldn’t be 1 point increase with 1 pip in the underlying spot FX. Which means if the spot FX moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Source: sentrix, saxobank
Currency Strength Index:FxWirePro's hourly EUR spot index is flashing at -54 levels (which is bearish), hourly JPY spot index was at 12 (mildly bullish) while articulating at (08:04 GMT). For more details on the index, please refer below weblink:
