FxWirePro: Bullish/Bearish Scenarios, OTC Updates of EUR/AUD and Hedging Perspectives Ahead of ECB

European central bank is lined up for monetary policy meeting on 12th September, following the ECB’s surprisingly dovish message in the recent past. For the eurozone, we have lowered our forecast for 2020 from 1.1% to 0.7% as Germany remains in the grey zone between lean growth and recession. The looming protracted economic slowdown suggests more than ever that the ECB will adopt a comprehensive easing package at its next meeting in September. The ECB should lower its deposit rate from -0.4% to -0.6%, introduce a tiered interest rate system to relieve banks of the penalty interest rate and resume net purchases of bonds.

The euro is likely to suffer from the fact that the ECB will resume its net purchases of bonds. We have therefore lowered our year-end forecast for EURAUD from 1.68 to 1.6550.

OTC Indications and Options Strategy: Please be noted that IV skews of EURAUD are stretched on either side, the positively skewed IVs of 3m tenors are signifying more hedging interests in bullish than bearish risks. More bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike up to 1.65 levels and bids for OTM puts show 1.56 levels.

Contemplating fundamental and OTC factors as explained above, although it is sensed that all chances of Aussie dollar looking superior over Euro in the near term and vice versa in the medium-term future; accordingly, we advise to hedge the puzzling swings through below options recommendations.

The execution: Spot reference: 1.6026 levels, buy 2 lots of at the money 0.51 delta call option of 3m tenor and simultaneously, buy at the money put option of 1m tenors. The option strap is more of a customized version of straddles but instruments slightly biased bullish risks. 

Alternatively, on hedging grounds, we advocated directional hedging strategy, we foresee significantly less upside for EURAUD in the near term, the pair could probably show slumps further in the near term.

Hence, it is wise to initiating shorts in EURAUD futures contracts of Sept’19 delivery as further downside risks are foreseen and simultaneously, longs in futures of Oct’19 delivery for the major uptrend. Thereby, one can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately.Courtesy: Sentrix & Commerzbank