FxWirePro: Hedging perspective via call spreads of precious yellow metal in euroarea

Eurozone ‘flash’ CPI inflation for June is forecasted to edge up to 2.0% from 1.9%; US data are expected to show robust growth in personal spending.

Gold strength vs EUR weakness via call spreads: Even following the recent bounce the back end XAUEUR vols are only 1 vol from the multi-decade low.

While somewhat scepticism still lingers on the resilience of the euroarea inflation outlook, as especially domestically generated price pressures remain muted. Hence, we expect the ECB to stick to its mantra and remain patient, prudent and persistent.

While inflation is moving in the right direction, further growth deterioration may delay the ECB's next steps.

Reminiscent of poor EUR sentiment topside OTM Gold strikes got bid to the highest level since 2009 (in terms of the ratio of 6M risk reversals to ATM vols) (refer 1st chart).

This setup helps economize bullish Gold play while hedging EUR risk and is supportive of call spreads that sell overpriced OTM strikes to cheapen already cheap ATM strikes.

At 220bp XAU, 6M ATM/25D XAUEUR call spreads are the cheapest in more than a decade (refer 2nd chart).

Hence, we recommend 6M XAUEUR call spread (strikes 1115/1165) that costs 135bp XAU, at 3X leverage and 49% discount to outright vanilla. Courtesy: JPM

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