Euro area GDP increased 1.4% QoQ, SAAR in Q3’16, very close to the PMI’s signal.

This raises the signaling value of the large PMI increase in October, pointing to some upside risk in Q4’16.

In the final report for October, the Euro area composite PMI was revised down 0.4pt to 53.3, which still left it 0.7pt higher than in September. The revision was mostly in services and in the periphery, although the former still rose in the month while the latter was stable at a solid level. Overall, the PMI’s message is positive. At the composite level, new orders rose only slightly (+0.1pt to 52.9).

Euro area unemployment fell and core inflation remained low.

Bank lending continued to hover at historical lows.

As occurred in the US before the Treasury taper tantrum in 2013, ECB QE has created a valuation and positioning problem that biases the euro to appreciate on even subtle changes in ECB policy.

German exports surged in August (see above nutshell evidencing external payments), having fallen significantly in July, due to holiday distortions. In September, we expect some payback, although the underlying trend should remain solid, in line with the recent strength in the business surveys.

FX Option Trade Tips:

1m ATM IVs of EURCAD are spiking above 11.12%, and likely to shrink from the current 30% to the 14 and odd pct in 1w tenor which is conducive for the option writer. While you can also observe the positively skewed IVs towards OTM calls that explains the hedgers upside risk averse sentiments.

Hence, at spot ref: 1.4757 (while articulating) we advocate below FX derivatives strategy as we favor optionality to the directional trades. After a series of bearish streaks in October, we are now inclined to position for a partial retracement of the upmove through call spreads, as calling it as the bottom out with a dragon fly doji pattern and as adding directional spot exposure is risky at the moment.

Thus, using any abrupt dips, you decide to initiate a diagonal debit/bull call spread (DDCS) at net debit.

The execution: Initiate shorts in 2W (1.5%) out the money calls with positive theta, simultaneously, buy 1M in the money 0.51 delta call option. Establish this option strategy if EURCAD is either foreseen to be in sideways or spike up considerably over the next month but certainly not beyond your upper strikes in short run.