FxWirePro: EURO crosses higher and dollar crosses lower dual digitals

With limited room for Euro appreciation and the near certainty of a vol slump in the event of a Macron victory, long delta/short vega strategies such as EUR call flies appeal, and are well-priced in EURUSD and EURCAD. Higher leverage expressions of Euro strength are [EUR/CCY higher, USD/CCY lower] and [EURUSD higher, EuroStoxx higher] dual digitals.

Baskets of EUR-crosses that rally alongside EURUSD do not offer much by way of correlation savings since EUR based correlations have climbed appreciably this year. A more effective tactic is to decompose EURUSD into a EUR-cross and a USD-pair and bet on their de-correlation. For instance, EURAUD can be reasonably expected to track the broad EUR-uptrend even as AUDUSD remains flat/inches mildly higher in a risk-friendly post-Macron environment.

The option pricing clincher is that AUDUSD vs. AUDEUR implied correlations are marked at 52%, so clearly not priced for such divergence in two traditionally well-correlated AUD pairs. The above chart runs through a pricing exercise of this family of structures across various pivot currencies and shows that KRW, NZD, and AUD offer the best value.

Since the broad dollar is trading meaningfully cheap to rate differentials, USD legs in this set-up need be struck more conservatively (ATMS) than the EUR-cross.

2M [EURKRW > 1% OTMS, USDKRW < ATMS] dual digital costs 13.1/16.5% KRW indic. (indiv. digis 41.8% and 51.4% respectively).

2M [EURNZD > 1% OTMS, NZDUSD > ATMS] dual digital costs 15.2/18.7% NZD indic. (indiv. digis 44.3% and 52.8% respectively).

2M [EURAUD >1% OTMS, AUDUSD > ATMS] dual digital costs 16.8/20.3% AUD indic. (indiv. digis 43.3% and 54.1% respectively).