FxWirePro: Spotlight on EUR/USD divergence of IVs & HVs, and Spot & RRs – IVs seem deceptive, bid skews and RRs to hedge

We could foresee euro’s bearish scenarios on following driving forces:

1) Euro area growth is stuck below 2% and ECB hikes only in 2020; 

2) The prolonged political dissents and apprehensions in France, a populist tide at the European parliamentary polls in May.

3) The resumption of the EM sell-off boosts USD due to the prevalence of cross-border FX funding in USD,

Please be noted that EURUSD shows the divergence between implied volatility (IV) and historic volatility (HV) curves. Also, be noted that spot and risk reversal curves. Volatility traders perceptibly expect only about what is likely to and what actually turns out. As you could observe the above chart, Jan’2018 seems to be an average month as the divergence between implied volatility and historic volatility. IVs have constantly been sliding, while RVs are spiking higher. 

Spot curves of this pair move in tandem with risk reversal curve until of-late, now they are also showing divergence. 

From this perspective, the real far-off month, when HV was actually higher than implied volatility, then the only such instance of divergence during the recent timeframe observed.

While 3m positively skewed IVs have still been signaling downside risks. 

Skews stretched towards OTM put strikes signifies hedgers interest in the further bearish risks.

To substantiate these indications, bearish neutral RRs across all tenors, which is in line with the above-stated bearish scenarios.

All these indications coupled with the fundamental news and the underlying scenarios are attractively appealing put holders. Contemplating all these factors, we advocate below options strategy.

Initiate long in 2 lots of EURUSD at the money -0.49 delta put options of 3M tenors. Dubious bulls can also deploy 1% in the money puts with attractive delta. Thereby, in the money put option with a very strong delta will move in tandem with the underlying. Courtesy: Sentrix, Saxobank

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 92 levels (which is bullish), while hourly USD spot index was at -34 (bearish) while articulating (at 12:28 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex