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This week, although EURUSD price gains to the current levels of 1.0628 levels from the lows of 1.0518 levels, interim bulls are still lingering near 1-year lows to create space for more slumps as the long lasting major non-directional trend is now turning into bears favor.
The spot reference is at 1.0648 (at the time of articulating) which is just 132 pips away from 1-year lows (i.e. 1.0516).
The SGD trades with a very strong correlation to the overall dollar cycle. It has been tightly linked to the EURUSD in the past year and the relationship should hold going forward given the SGD NEER framework.
Tracking EUR to parity In Q1’17, we expect the EURUSD to break through the technical support at 1.05 and to reach parity (Trumped up changes). We previously provided trade recommendations for a significantly lower EURUSD.
Hence, we advise buying USDSGD 3m one-touch knock-in 1.4955 Indicative offer: 22% (spot ref: 1.4227) The one-touch option has a binary payoff of either zero at expiry if the barrier level is not reached, or the notional amount if the 1.4955 barrier level is triggered at any point over the 3m tenor, the maximum leverage is 5 times.
Alternative structure: For investors who prefer a cheaper structure, a USDSGD 3m European digital strike 1.4950 costs only 12% (leverage of 8 times).
Risk/reward profile:
Tracking EUR to parity In Q1’17, we expect the EURUSD to break through the technical support at 1.05 and to reach parity (Trumped up changes). We previously provided trade recommendations for a significantly lower EURUSD (EURUSD -Dipping or taking a deep dive?). If the pair does indeed test 1.00, USDSGD should rise towards 1.50.
EURUSD downside stalls, the failure of the EURUSD to convincingly break through 1.05 would prevent the USDSGD from heading towards 1.50.
As a result, the maximum loss of both proposals is limited to the premium paid. This happens for the one-touch if the USDSGD never hits 1.4955 and for the digital KO if USDSGD trades below 1.4955 at expiry.
