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FxWirePro: Directional Hedging Plots Amid Low-Vol Scenarios, Shift in EUR/USD OTC Sentiments Indicate Far-Tenured Call Spreads
FxWirePro: Dovish rhetoric from both ECB/BOE keeps EUR/GBP on seesaw mode – 3-way straddles ideal options to hedge
ECB: It is remarkable that only two weeks after the last ECB meeting its President Mario Draghi sounds clearly dovish at the ECB Conference in Sintra and underlines that further monetary policy easing will be required unless the economic situation improves and then goes on to quote all the expansionary instruments available to the ECB. As early as in the coming weeks, i.e. very short term, the Governing Council will consider this matter. That means it is quite possible that the ECB will lower its deposit rate even before the Fed in July – so that we will have a head-to-head rate cut race between it and its colleagues in New York. The ECB’s fundamental concern in this context is the recent collapse in inflation expectations that started only a few days after the last ECB meeting. That means that something the market has been pricing in for a while, an ECB rate cut, is now almost official. And it might come very soon. And nobody seems to mind that according to the forward guidance interest rates are meant to remain at current levels for the entire first half of 2020 (“The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020“, press release of 6th June 2019).
Draghi’s significant about-turn put pressure on the euro yesterday, as the market felt confirmed in its rate cut expectations for the second half of the year. On the other hand, the losses are limited at only half a cent, as the market had priced in a rate cut for some time and this was only like a confirmation.
BoE: BoE in no need of rate changes. In August last year, the Bank Rate was lifted to 0.75%. Despite the guidance for gradually higher rates, the market is at present pricing in a very low probability of reduced rates over the coming year (see chart below right). If Brexit is implemented this autumn, the outlook could change substantially, but the global economy is slowing and inflation pressures will likely stay subdued.
Hence, we believe the markets are correct at the moment. The BoE announcement is due at 13:00 CET on Thursday 20 June, along with the minutes from the meeting. There will be no inflation report at this meeting.
OTC Updates: Well, ahead of these events, let’s just quickly glance at OTC outlook before looking at the options strategies.
Bullish neutral risk reversals of EURGBP have been observed to the broader bullish risk outlook in the FX OTC markets, this is interpreted as the hedgers are still keen on bullish risks but with mild downside risk sentiment in the near-term, while the pair displays 6.49-6.82% of IVs.
While positively skewed IVs of EURGBP has been balanced on either side, bids for both OTM calls and OTM puts. This is conducive for options holders of both OTM call and put options.
Even if you see any fresh positive bids in EURGBP risk reversals to the existing bullish setup, it should not be perceived as the bearish scenario changer. Instead, below options strategy could be deployed amid such topsy-turvy outlook.
3-way options straddle versus ITM calls are advocated seem to be the most suitable strategy for EURGBP contemplating some OTC sentiments and geopolitical aspects.
Options Strategy: The strategy comprises of at the money +0.51 delta call and at the money -0.49 delta put options of 1m tenors, simultaneously, short (1%) ITM puts of 1w tenors. The strategy could be executed at net debit but with a reduced trading cost.
Hence, on hedging as well as trading grounds, initiate above positions with a view of arresting potential FX risks on either side but slightly favoring short-term bearish risks. Courtesy: Sentrix, Saxo and Commerzbank
Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -90 levels (which is bearish), GBP is at 47 (mildly bullish), while articulating (at 13:24 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex