FxWirePro: Intricacies of EUR/USD risk reversals and how-to hedge dollar-denominated income ahead of US employment and ECB?

USD seems to be little vulnerable in the short-run on risk sentiments ahead of NFP that is scheduled for this Friday. Ahead of the US labor market numbers tomorrow, watch for evolving Sino-US headlines and ECB meeting minutes for further cues. ECB’s monetary policy is also scheduled for the next week.

For today, expect investors to trade on the ebb and flow of risk appetite developments, with the global data flow and the equity complex also supportive of risk-taking behavior.

In a nutshell, the USD may remain slightly wobbly, with short-end riskies have also been leaning slightly against the USD in G7 space.

EURUSD’s upswings are observed from last 2-3 days in a row ever since it has jumped from the lows of 1.1183 levels. However, the interim upswings unlikely to sustain in the long-run. We emphasized this bearish stance even in our technical section.

Most importantly, the FX OTC hedging markets are also suggesting the same thing, the IVs and risk reversals of the short tenors indicate interim rallies but the major bearish hedging sentiment remain intact.

Hedge USD-denominated income via risk reversals (RRs): The bearish neutral RRs across all tenors have still been signaling downside risks.

3m positively skewed IVs are in line with the above-stated bearish scenarios. Skews stretched towards OTM put strikes signifies hedgers interest in the further bearish risks.

We see potential further USD strength and limited risk of significant USD weakening in the short-run, and notably, our EURUSD forecast is now running close to forwards on all horizons (vs previously above) and across tenors.

As a result, we recommend hedging USD-denominated income via risk reversals: this allows one to profit from some dollar strength near term (as per our call), yet still secures a worst-case rate without locking in the negative carry from the outset.

Any skepticism for the upside risks in the minor trend could be arrested by deploying 3m 1% in the money puts with attractive delta. Thereby, if you buy in the money put option, on hedging grounds, with a very strong delta will move in tandem with the underlying.Courtesy: Sentrix & Saxo

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards 25 levels (which is mildly bullish), while hourly USD spot index was at 4 (neutral) while articulating (at 10:47 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex