FxWirePro: Euro-bloc OTC Updates and Hedging Ideas Ahead of ECB

EURUSD. Strong forward guidance from the ECB should give some counterweight to a continuation of the Fed rate cuts in the short-term. Eventually, we believe the Fed will get ahead of the curve and push EURUSD higher.

We lift our near-term target a little following trade and Brexit clarity and now see EURUSD at 1.11 in 1M and 3M (from 1.10) while keeping forecasts unchanged at 1.13 in 6M and 1.15 in 12M.

EURGBP: While sterling sold off in September, reaching 0.90, the reconciliation between Irish Prime Minister Leo Varadkar and Boris Johnson changed this and EURGBP has moved to 0.86. A deal has now been struck with the EU but it faces hurdles in passing Parliament. Tail risk in sterling has come down substantially, which we reflect by taking our forecasts towards a stronger GBP but only slightly so. We have shifted our forecast to include the shift in probabilities where the risk of no-deal has faded. In turn, we revise our EURGBP profile from 0.90 to 0.875 in 1M, 3M, 6M and 12M. In the big picture, we expect the cross to trade in the 0.85-0.90 range. 

3-way options straddle versus ITM calls strategy is advocated seem to be the most suitable for EURGBP contemplating above factors. The strategy comprises of at the money +0.51 delta call and at the money -0.49 delta put options of 2m tenors, simultaneously, short (1%) ITM puts of 1w tenors. The strategy could be executed at net debit but with a reduced trading cost.

EURJPY, on the hand, has resumed bearish trend and we advocated shorts in futures contracts of mid-month tenors with a view to arresting potential dips, since further price dips are foreseen we would like to uphold the same strategy ahead of ECB’s monetary policy that is scheduled for this week.

EURSEK: We still see no scope for a sustained turnaround in the SEK and maintain our bearish view based on a cyclical slowdown and subdued inflationary pressure. We have a hard time seeing the Riksbank actually hiking, on top of the above, in the same global economic environment where most importantly the ECB, but also the Fed, has eased policy.

Hence, the Riksbank is expected to postpone the rate hike planned for year-end and even though timing is tricky, we still see the Riksbank cutting rates in February 2020. However, the recent uncertainty regarding the labour market might buy the Riksbank some more time before it acts. 

Overall, The projection is raised to 10.90 in 1M, 11.00 in 3M and 11.20 in 6-12M and stick to this here. 

Accordingly, USDSEK vs EURSEK vol spread has been activated as a positive vol carry RV expression via long 2M USDSEK 9.96/9.13 strikes strangle @7.75/8.4vols vs short 2M EURSEK straddle @5.65ch, pays 85bp SEK, not delta hedged; spot reference: 9.63 and 10.725, respectively. Courtesy: Danske