FxWirePro: ECB most likely to maintain status quo - Uphold EUR/AUD Options Straps bidding 3m IV skews

Today’s ECB meeting is most likely to be a non-event. The Council’s view of the economy is well known by now after growth and inflation projections were lowered in March. The downside risks for the economy are still likely to dominate as far as the ECB is concerned, even though it expects a recovery in the second half. There is currently no reason that would call for any changes to that. As it is probably still too early for any detailed information on the new TLTROs the market probably has to accept that it will not get much in the way of news. As a result, the euro’s reaction is likely to be limited. 

The ECB’s most important tools are likely to be the Forward Guidance and the long term tender, so we learned in the recent past. 

No doubt the ECB will tolerate a few months waiting time for the data to improve, but the market will likely want to see improvement pretty soon. If that does not materialize but if instead economic data disappoints over the coming days and weeks the market could have EURAUD a brief look below 1.54 level in the short-term and aim for the above 1.6140 mark in the medium term. Let’s wait and see what the March inflation data will bring on Monday.

OTC Indications and Options Strategy: Please be noted that IV skews of EURAUD are stretched on either side, the positively skewed IVs of 3m tenors are signifying more hedging interests in both bullish and bearish risks. The bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike up to 1.62 levels and bids for OTM puts show 1.5350 levels.

Contemplating fundamental and OTC factors as explained above, although it is sensed that all chances of Aussie dollar looking superior over Euro in the near term and vice versa in the medium-term future; accordingly, we advise to hedge the puzzling swings through below options recommendations.

The execution: Spot reference: 1.5760 levels, buy 2 lots of at the money -0.49 delta call option of 2m tenor and simultaneously, buy at the money put option of similar expiries. The option strap is a more customized version of straddles but instruments slightly biased bullish risks. 

Huge profits achievable with the strip strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a downward move. 

Hence, any hedger or trader who believes the underlying currency is more likely to slide downside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid. Courtesy: Sentrix & Commerzbank

Currency Strength Index: FxWirePro's hourly EUR spot index has shown 71 (bullish), while AUD is flashing at 72 (bullish) while articulating at 09:56 GMT.

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex