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FxWirePro: Mitigate risks of dollar-denominated receivables - EUR/USD hedging dimensions and via FX derivatives vehicles

Following the ECB’s surprisingly dovish message last week, signaling no hikes in 2019, we see significantly less upside for EURUSD this year. Crucially, the ECB has now broadened the range of policy options to include not only the question of when to start hiking rates but also the probability of monetary easing.

EURUSD could probably decline further in the short term, and we see a possibility of the cross falling towards 1.10. The main reasons are the following: 1) eurozone growth is set to stay weak for most of H1’2019 and the ECB is clearly keeping an eye on this risk; 2) the US economy is likely to stabilize in H1’2019, providing pockets of support for the USD as the market reprices the Fed. We see EURUSD at 1.13 on a 3M horizon.

Further out, the US-China trade deal should drive stabilization of the Chinese economy and have a positive effect on the eurozone which together with a USD that remains overvalued on fundamentals – helps set a floor for EURUSD still. We see EURUSD at 1.17 on a 12M horizon.

Hedge USD-denominated income via risk reversals 

We see potential further USD strength short term and limited risk of significant USD weakening this year, 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. 

Hedge USD-denominated expenses via (knock-in) forwards 

For shorter-term horizons (up to 3 months), we recommend hedging USD-denominated expenses via FX forwards, as we see a risk of more USD strength. For longer-term maturities (over 3 months), consider incorporating optionality, which enables one to gain from a EURUSD increase; this could be done by means of knock-in forwards, which allow one to sell EURUSD above the current spot should USD weaken over time (as per our call), while still securing a worst-case rate. Courtesy: Danske

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 53 levels (which is bullish), while hourly USD spot index was at -84 (bearish) while articulating at (09:42 GMT).

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

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