A glimpse on fundamentals:

German IP plunged, likely due to holiday distortions.

German VDA car production data already point to a big rebound in January.

German election thrown open by the change in SPD leadership, while in France Le Pen revealed her agenda.

Feb consumer confidence in Eurozone: Confidence printed -4.9 in Jan which is a high dating back to early 2015. Consumer confidence gained some momentum in late 2016 after a poor start to the year and a downturn around Brexit. Though recent GDP and manufacturing surveys have been more positive, given the ongoing political uncertainty that foreshadows 2017, it is difficult to see the index strengthening much further

OTC updates:

The implied volatilities of EURAUD ATM contracts are trading shy above 7.13% and 8.08% for 2w and 2m tenors respectively, while the spot price in technical trend approaching near crucial juncture at the support of falling wedge, it seems to be equal opportunity for both bulls and bears with option writers of deep OTM calls are on slight upper hand.

While positively skewed 2w IVs are signaling the luring opportunities in out of the money call writings as the IVs are also on a lower side which is conducive for option writers. Hence, we encourage 2w 1.41 EURAUD call.

Hedging Framework:

3-Way Options straddle versus OTM call
Spread ratio: (Long 1: Long 1: Short 1)

How to execute:

At spot reference: 1.3840, initiate long in EURAUD 2M at the money +0.51 delta call, go long 2M at the money -0.49 delta put and simultaneously, short 2w (1.5%) out of the money call with positive theta.

Rationale on fundamental grounds: Euro area business and consumer surveys point to solid growth momentum in the region. Sentiment improved significantly during Q4’16 and remained robust in January, with the strong sector and country details. Consistent with this signal, Euro area GDP increased a solid 2% QoQ, SAAR in Q4’16 and was revised up for Q3 in the flash GDP report, published almost two weeks ago. Since then, the December plunge in German IP reported this week contradicted this positive message.

But, in our view, there are good reasons to fade this IP weakness, given that industrial orders were strong and that the VDA car production data already show a big rebound in January. The December IP drop could lead to a slight downward revision to Q4’16 Euro area GDP but should be compensated in Q1’17. Moreover, elections in this region are likely to add turbulence to the FX markets.