Menu

Search

Menu

Search

FxWirePro: Hedging European political risk - Buy EUR/JPY 3m one-touch vanilla

The FX euro vol market is complacent compared to the bond market, seeing the resilient 10y OAT-Bund spread. This relief offers an attractive entry point to hedge a large euro downside move via options. The 3m downside skew in euro crosses retraced sharply, and almost fell to last year levels in the EURUSD and EURGBP (see above graphs).

The EURJPY and EURCHF skew are also materially less expensive, with, in particular, the EURJPY 3m risk reversal returning below -3 from -5. Indeed, the 3m ATM vol is not that high compared to the spot level, further suggesting designing a long vega hedge.

The likely victory of a market-friendly candidate would redirect attention to ECB tightening, propelling the euro gradually higher.

On the contrary, a Le Pen victory would imply an immediate and significant bearish impact.

FX/bond correlations elect a short EURJPY as the best hedge. A scenario with the OAT Bund widening to 150bp would send the EURJPY to 108 and the EURUSD to 0.99.

A one-touch option takes advantage of the complacent relief in skew, benefits from a rise in downside vol and is the best way to catch a short-lived bottom in spot.

Buy EURJPY 3m one-touch knock-in 108 @ 13% (7 times leverage).

Rationale: The likely victory of a market-friendly candidate would redirect attention to the modalities of ECB tightening, propelling the euro gradually higher.

In contrast, a Le Pen victory would have an immediate and significant bearish impact.

FX/bond correlations elect a short EURJPY as the best hedge.

A scenario with the OAT-Bund widening to 150bp would likely send it to 109.

  • ET PRO
  • Market Data

Market-moving news and views, 24 hours a day >

December 15 21:00 UTC Released

USOverall Net Capital Flows

Actual

151.2 Bln USD

Forecast

Previous

-51.3 Bln USD

December 15 21:00 UTC Released

USNet L-T Flows,Incl.Swaps

Actual

7.9 Bln USD

Forecast

Previous

65.1 Bln USD

January 9 11:00 UTC 3409034090m

BRRetail Sales MM*

Actual

Forecast

0.35 %

Previous

January 9 11:00 UTC 3409034090m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3409034090m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3409034090m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

January 9 11:00 UTC 3409034090m

BRRetail Sales MM*

Actual

Forecast

0.35 %

Previous

January 9 11:00 UTC 3409034090m

BRRetail Sales YY*

Actual

Forecast

3.20 %

Previous

December 12 09:30 UTC 63216321m

GBRPIX YY

Actual

Forecast

Previous

4.2 %

December 12 09:30 UTC 63216321m

GBPPI Input Prices MM NSA

Actual

Forecast

Previous

1 %

Close

Welcome to EconoTimes

Sign up for daily updates for the most important
stories unfolding in the global economy.