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We reckon that a period of disenchantment with the euro is going through. Couple of months ago, if it appeared as if the euro zone would integrate further, following the election of Emmanuel Macron as French President in particular, however, this delightful impression is fading increasingly. There is disenchantment with Macron himself in France. He is suffering from a loss of ministers and has to reshuffle his cabinet. His reform plans are very contentious amongst the population. The toing and froing about the Italian budget on the other hand illustrates that the debt issue is far from off the agenda in the euro zone either - regardless of QE.
According to Klaas Knot (Bank of Netherlands), member of the ECB’s governing council, the risk of contagion for other euro zone countries is limited, but on the other hand it is not the task of the ECB to correct or compensate for purely national policies. A crisis scenario seems unlikely, but the issue would remain as an apprehensive for the euro.
We are near-term neutral EUR despite a resolute ECB given softer data. ECB is a long way from hiking and trade tensions are worsening. On the flip side, NAFTA has become the dominant driving force for CAD in the near-terms, as the negotiation process has seemed to enter its end stage.
EURCAD OTC outlook:
While 1m IV skews have been well balanced on either side and signify the hedgers’ interests on both OTM call and put strikes. Amid bearish sentiments with lower IVs are interpreted as conducive environment for writing overpriced OTM calls. Using three-leg strategy would be a smart move to reduce hedging cost.
Options Strategy:
Contemplating above driving forces and OTC indications, we advocate initiating longs in 1M EURCAD at the money -0.49 delta put, and go long in at the money +0.51 delta call of similar expiry and simultaneously, short 1w (1%) out of the money calls. Thereby, we favor slightly on downside risks as short leg likely to reduce long legs.
Currency Strength Index:
FxWirePro's hourly EUR spot index is flashing at -86 (which is bearish), while hourly CAD spot index was at -40 (bearish) at 09:18 GMT. For more details on the index, please refer below weblink:
