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Pandemic COVID-19 impact has broadened, eliciting abrupt financial market moves. We all know that the strength of a relationship can be severely tested during times of crisis. This is currently very obvious in the EU, and the euro is not taking it well. There is no agreement about how to support the member countries most badly affected by the virus. Suggestions have been made to use funds from the ESM (European Stability Mechanism) on a euro level.
Hence, we emphasize on euro trades, stay short in EURCHF; while short EURUSD was stopped out at a loss, while trade EURGBP via options.
We had been recommending a basket of EUR shorts expressed vs USD, CNH and CHF. The trades were motivated by the possibility of widespread credit stress within the private sector resulting from the unprecedented collapse in economic activity.
And while the ECB was starting to innovate to deal with this threat, hence the eligibility for CP in the PEPP purchases, there is surely more that the ECB will need to do to maintain the flow of credit to corporates and households as activity goes into freefall, especially regarding potential co-ordination with the fiscal authorities to deal with credit losses. Germany did step up its fiscal response this week by abandoning its balanced budget policy, but nonetheless, a reacceleration of infection rates in Italy combined with recent developments in Spain, France and Germany keeps us cautious.
We booked profits on EURCNH last week and got stopped out of EURUSD at a modest loss this week amid heightened volatility. But like with the US, we don’t expect that the fiscal response will decisively cause the growth outlook to bottom out yet. We thus stay short EUR vs. CHF outright.
Trade tips:
Short EURUSD was stopped out at 1.095. Marked at -2.00%.
Short EURCHF from 1.0577. Marked at +0.02%.
Trade EURGBP via options, the strategy comprises of buying at the money +0.51 delta call and at the money -0.49 delta put options of 2m tenors, simultaneously, short (1%) ITM put option of 2w tenors. The strategy could be executed at net debit but with a reduced trading cost. Courtesy: JPM
