FxWirePro: EUR/USD game changer derivatives trades on effective functionality

The dollar’s cyclical peak came right at the start of 2017, and soon after we saw US Treasury yields peak in late December. EURUSD remained above 1.1650 this morning, likely to edge towards 2-years highs of 1.1714 levels. This has already been very well anticipated as the next semester should see the euro break above its range of the last few years, and interest rate volatility fueled by central banks exiting accommodation will be channeled towards FX.

As a result, buying 6m EURUSD calls seems conditioned by higher volatility.

While Reflation in Europe and the US should involve a steepening of the volatility term structure, making long positions in EURUSD forward volatility very attractive.

EA strong capital surplus and the ECB withdrawing from QE are strong forces that may propel the euro much higher than our 2018 forecasts. Buy EURUSD 2y OTM calls financed by selling the bottom of the range via expensive puts.

Towards the top of the EURUSD range: Stay long in EURUSD via 6m call strike 1.15, European KI on the realized volatility at 9% Indicative offer: 0.60% (vanilla: 1.61%, volatility swap: 7.6%).

Reflation set to boost forward vol: Go long EURUSD forward volatility agreement 6m6m Indicative offer: 7.8.

The game-changing scenario: 1.30 in 2018. Buy EURUSD 2y call strike 1.27, Sell 2y put strike 1.06 Indicative offer: 0.33% (Spot ref: 1.1652).