FxWirePro: Euro on expansionary mode – Deploy EURUSD digital calls

The EUR is modestly higher on the day alongside the relatively broad market movement against the USD and following yesterday’s trend-breaking drop for the common currency. It follows market tone after modest losses yesterday. Nov business confidence numbers in France were mostly looked through by markets, with manufacturing confidence in France rising slightly to its highest point since Aug, although Brexit and trade uncertainty maintain activity in the sector significantly depressed around Europe. France’s Markit manufacturing PMI gauge remains slightly within expansionary territory but the protests against pension reform which erupted in early-Dec may prevent a prompt recovery for the French economy as was hoped for on the back of easing trade and Brexit risks.

ECB Chief Economist Philip Lane will chair a panel at an ECB conference on fiscal policy and EMU governance. 

Trade recommendation:

Stay long EURUSD digital call: EURUSD flashes positive risk reversal numbers that indicates the hedging sentiments for the upside risks.

Prices for levered versions of call spreads have recently been the lowest in five years due to record low base vols and positive risk reversals. So while the timing for European reflation trades is not ideal absent better data, this is partly offset by attractive cost considerations. The strong Conservative majority provides some support to EUR as well, and we keep an eye on momentum above 1.12. Broad-dollar selling into 1Q should further support the trade. 

Hence, add long in a 4M 1.15 digital EUR call/USD put for 11.5% (spot ref 1.1113). Marked at 16.7%. Courtesy: JPM, Saxo & Scotiabank