This month we take a closer look at the recent weakening of the USD and our EUR/USD exchange rate expectations for the next year. The latest move higher in EUR/USD has been faster than even we had anticipated at the end of 2015.

Bur for now, although currently the dollar remained supported after data on Thursday showed that initial jobless claims decreased by 4,000 to 262,000 last week, compared to expectations for a 1,000 decline to 265,000.

We recommend that companies hedge USD-denominated expenses payable up to three months from now via FX forwards. This would protect against any short-term EUR/USD decline prompted by a faster-than-expected increase in US rates and yields and/or a Brexit. Also, FX forwards would secure a premium on the forward exchange rate relative to the spot rate due to the EUR-USD yield spread.

For USD-denominated expenses payable on 3M-12M horizons, we recommend hedging via options that maintain a profit potential in the event of an increase in EUR/USD, while also securing a worst-case exchange rate.

More specifically, we recommend hedging USD-denominated expenses via knock-in forwards with window barriers, with the barrier open for one month before each maturity date.

A 6M structure could, for example, be entered at zero cost (indicative pricing, spot ref. 1.1313) and would allow advantage to be taken of any increase in EUR/USD up to 1.2630 (an increase of just over 12% relative to current spot).

Meanwhile, the strategy would secure a guaranteed minimum exchange rate of 1.1000, leaving protection against any EUR/USD fall of just over 3%.

As such, this strategy would enable advantage to be taken of a significant increase in EUR/USD, while also guaranteeing a favourable selling rate over the entire strategy period.