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We have woken up this morning unsurprised by the Fed decision and the market response; indeed, the policymakers’ median forecast is now fully aligned with our call that there would be three further hikes in 2018, followed by another two in 2019. We don’t expect the Fed to change its tone or direction appreciably under the incoming Chair Powell.
As the ECB edges towards normalization, an undervalued euro has room to rise further, the tide of positioning (long euros) and yield differentials (still heavily in the dollar’s favor) is against the euro. The upshot is that progress from current levels towards ‘fair value’ somewhere closer to EURUSD 1.30, will be choppy and slow. EURUSD likely to gradually increase and reach the 1.23 level by the mid-year point. Tech is the sector with the highest exposure to international revenue, so a weaker dollar would be a tailwind. Moreover, the powerful worldwide tech cycle may not be dead yet and NASDAQ could surprise more on the upside.
The historically low level of volatility makes call premia cheap and the negative correlation between NDX and EURUSD dramatically enhances that cheapness. The recent leg down in the index is an interesting entry point into the trade.
The S&P500 could reach 2800 early next year on approval of tax reform and so is the case with NDX – increase exposure to this theme.
As a result, we advocate buying NDX Call 6-month 102.5% contingent on EURUSD above 1.235 for 0.85% – 77% discount to vanilla (3.7% for a 6-month 45Delta call) (References: NDX 6394pt, EURUSD 1.1818).
Risks: only the premium is at risk if the NDX ends up below its strike AND the EURUSD is not above its barrier at expiry.
Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 57 levels (which is bullish). Hourly USD spot index was at shy above -113 (bearish) while articulating (at 11:57 GMT).
For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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