FxWirePro: A run through on EUR RV trades ahead of euro-area PMIs

The IHS Markit Eurozone Manufacturing PMI was revised lower to 47.5 in March of 2019 from a preliminary of 47.6 and 49.3 in February. The reading pointed to the sharpest contraction in factory activity since April of 2013, with Germany manufacturing falling at the fastest pace since July of 2012 and leading the overall downturn, final estimates showed. Export orders declined the most since August of 2012; factory output dropped and input buying reduced the most for just short of six years.

The IHS Markit Eurozone Services PMI was revised higher to 53.3 from a preliminary 52.7, above the previous month’s 52.8 and compared with market consensus of 52.7, the final estimate showed. Also, growth was mainly driven by Germany and Spain, where rates of growth strengthened since February. 

Stay short EURCHF in cash. Keep 3-month EURUSD put. Stay long a 3m EURJPY put funded by a 3m USDJPY put (roll strike).
As noted earlier, while potential stabilization out of China and modest improvements in the composite Euro-area PMIs are puzzling EUR, the region is still the laggard from a global standpoint on growth and stabilization of various growth metrics is at a nascent stage. 

Our growth forecast for the Euro area has been stable for just three months (EM has been stable for five). 

Moreover, the surprisingly-large drop in core inflation (0.2% miss) highlights risks surrounding the ECB’s rate guidance, especially when taken in context of an ECB that is arguably undershooting its inflation mandate and is considering shifting to a tiered-rate system that could drive interest rates further into negative territory. The ECB meets next week and may provide further insight into this. 

Cyclical headwinds to the euro thus keep us bearish on the currency on the crosses (JPY, CHF) and the dollar. 

Nonetheless, the risk of further improvement in regional data can’t be ruled out. 

Hence, only one of our recommended trades, EURCHF is expressed outright. The other two are via options. EURUSD is through a long put and hence limited loss. 

Our bearish EURJPY exposure was partly funded via and USDJPY put which we restrike to a higher level (from 108.50 to 110.00) to take in more premium. The BoJ will be in focus next week and we expect them to follow in the footsteps of other DM central banks and turn more dovish, which should still be conducive of selling USDJPY downside (Disinflation will prompt BoJ to strengthen forward guidance). 

Trade tips: 

Hold a 3m EUR put/USD call, strike 1.10, for 35bp. Marked at 0.25% 

Hold a 3m EUR put/JPY call, strike 121.50 and sell a 3m USD put/JPY call, strike 108.50. The total net premium received of 24bp (see table for details). Marked at -0.29%. 

Hold short EURCHF at 1.1244 with a stop at 1.1469. Marked at 0.03%. Courtesy: TradingEconomics & JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 35 levels (which is mildly bullish), while hourly USD spot index was at 6 (neutral) while articulating (at 06:50 GMT). 

For more details on the index, please refer below weblink:

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