FxWirePro: Reconsidering Euro Forecasts And Trade EUR/USD With Pinch of Salt Via Digital Call

The deadly coronavirus has adversely affected almost of walks of lives in China. Amid such a lingering threat, the outbreak of a novel coronavirus (2019-nCoV), which originated in the central Chinese city of Wuhan, has now been declared a global emergency by the World Health Organization. The virus has already spread to the extent that it will have a adverse impact on China's economy. The Economist Intelligence Unit plans to revise its baseline forecast for China’s real GDP growth in 2020 to 5.4%, from 5.9% currently and now poses a risk to the global economic outlook also. 

The implied fx volatility is falling once again owing to the concerns surrounding the coronavirus. The historic lows seen last month have almost been reached again. We increasingly feel confirmed in our view that volatility will remain at low levels for structural reasons, or that it might even fall further. That has now caused us to adjust our EURUSD forecast, as well as some other FX forecasts - not as far the direction of the move is concerned but regarding the size of the move. We still see important reasons for USD weakness, for instance, due to growing concerns that the US administration will solidify its "weak dollar policy".

In particular, Donald Trump's success in the impeachment procedures - even if it was expected all along due to the Republican majority in the Senate - should perhaps not simply be brushed aside in this context. The US President may feel emboldened in his position and thus refrain even less from unconventional measures to weaken the dollar.

Many analysts have been resetting forecasts for bullish EURUSD, we too squared-off our positions and booked nominal profits from one of our bullish EURUSD option trades that we had recommended in the recent past (a EURUSD - EURNOK call spread switch).

The rationale for these trades was not that we had a great deal of confidence in a European upturn - we were pretty skeptical about this rather that EURUSD offered a decent risk/reward even if the prospects for a cyclical upswing were no better really than 50:50. But even though the Euro area’s strong BoP position does provide underlying support for the currency, and the euro won’t really depreciate by too much even if the economy does remain lacklustre weak, for the currency to rally still requires the economy to step up, and suffice to say there is not much evidence of this occurring. Indeed, 4Q Euro area GDP printed at only 0.4% this week, the weakest since the debt-crisis in 2013 and only one-quarter the pace of US growth in the same period.

Everything all told we therefore continue to forecast rising EURUSD levels, but we have lowered our year-end forecast from 1.18 to 1.16.

Hence, we hold the digital call only because it is now worthless. Maintain long in a 4M 1.15 digital EUR call/USD put. Paid 11.5% in November, marked at 3.28%. Courtesy: JPM & Commerzbank