Today’s most notable economic data from the euro area will come from the ECB, as it publishes the results of its latest Bank Lending Survey. These might be watched to judge any change in attitude at the region’s banks in the wake of last month’s ECB policy package, which included several measures with direct impact on the financial sector including a 10bp cut in the deposit rate, the restart of QE, more generous conditions on the TLTRO-III liquidity operations, and – perhaps most notable – the introduction of a new tiered framework of reserve remuneration to apply from 30 October. The previous survey three months ago suggested that credit standards had tightened on business loans, the first time that had happened since 2014.
In particular, increased concerns about the economic outlook and heightened risk aversion had reportedly resulted in tighter internal guidelines and loan approval criteria despite favourable funding conditions. Credit standards had also tightened for consumer credit. Nevertheless, the hard lending data suggest that loan growth accelerated in Q3, so today’s survey findings might not be quite so downbeat.
The looming protracted economic slowdown suggests more than ever that the ECB will adopt a comprehensive easing package. 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 risks. More bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike up to 1.67 levels. Also be noted that the 1w skews are stretched on either side that indicates the hedging sentiments in near terms are positioned for both upside and downside risks.
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; we advise to hedge the puzzling swings through below options recommendations.
The execution: Spot reference: 1.6244 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 customized version of straddles but instruments slightly biased bullish risks. Courtesy: Sentrix & Daiwa


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