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The Bavarian state elections did not have an impact on the euro. Since nobody really expects Bavaria to re-introduce the Bavarian guilder or Hesse to be thrown out of the euro if voters reject the abolishment of capital punishment in two weeks, state elections in Germany are a non-event for the euro.
And that is true even if their outcomes make life more difficult for the grand coalition in Berlin. If, in a worst-case scenario, early elections were held, any new government would certainly consist of parties which pursue a compatible European policy agenda. This means that the framework conditions for the euro would re- main unchanged – and while political developments in Germany are quite important for us Germans, they will not have a major impact on the euro.
By considering a set of triplets of EUR-crosses in the G7 space, we would find that in a worst-of put structure, JPY, CHF and USD would be the one offering the least correlation discount (60%) vs the cheapest plain vanillas. By choosing the CHF, SEK, USD triplet, for instance, the correlation discount could rise to 80%, but the sensitivity to the BTP-Bund spread would typically find EUR to appreciate vs SEK on a higher level of spread, thus making the latter currency less suitable to be included in a EUR hedge trade.
The pricing of the structure remains competitive from a historical perspective (refer above chart), with the trade often delivering large PnL on the back of jumps in vols and/or correlations (with max leverage >10 times). We opt for 2% OTMS strikes for further cheapening the premium and structuring it as a proper tail-risk hedge. We consider 2M, 2% OTMS worst-of EURJPY put, EURCHF put, EURUSD put at 14/18.5 bps.
Alternatively, one could consider an implementation via dual-digitals involving just two EUR-crosses. Amongst the most sensitive EUR-crosses against the Italian yields, EURCHF lower EURUSD lower is the combination offering the highest maximum leverage (around 9 times). Courtesy: JPM
Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 4 levels (which is neutral), while hourly JPY spot index was at 132 (bullish), CHF is at -3 (neutral), while articulating at (10:03 GMT). For more details on the index, please refer below weblink:
