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The German summer nightmare 2018 seems over. The two coalition parties have reached a compromise on the immigration conflict. One major stumbling block remains the possible rejection of the compromise by the Social Democrats (SPD), the coalition partner, but I hope that we will be spared further disagreements.
We’re scaling back the defensive exposures following Europe’s agreement on migrant policy. This should prevent a fracturing of Merkel's coalition and reminds investors that very few issues are genuine existential threats to the EU. That being said, we stay short high-beta FX given that trade conflict will likely remain a chronic drag on confidence.
Europe’s migrant deal is potentially significant for EUR as this issue has detracted from what has been a steady normalization in the European data flow. With political risk now subsiding, there's scope for EUR to modestly rebound in line with neutral data surprises.
OTC outlook: The positively skewed IVs of EURUSD of 1m tenors signify the hedging interest of bearish risks, while mounting bearish risk sentiment is substantiated by increased negative risk reversal numbers.
Contemplating above-stated driving forces and OTC indications as shown above, accordingly options strips strategy is already advocated about a fortnight ago on hedging grounds. The options strips strategy which contains 3 legs needs to be maintained with a view to arresting price downside risks.
Option Strategy: Options Strips
Combination ratio: (2:1)
Rationale: Considering the bearish technical environment in the recent past and most importantly, the skews in the sensitivity tool indicate hedging sentiments for the bearish risks, these risks are coupled with bearish risk reversal numbers.
The execution:
As shown in the diagram, initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 1M 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 either side and likely to derive exponential returns but with more potential on the downside.
Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 37 levels (which is bullish), while USD is flashing at -156 (which is bearish) while articulating at (07:20 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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