U.S. Banks Report Strong Q4 Profits Amid Investment Banking Surge 
Goldman Predicts 50% Odds of 10% U.S. Tariff on Copper by Q1 Close 
Japan’s Finance Minister Signals Alignment With BOJ as Rate Hike Speculation Grows 
China’s Growth Faces Structural Challenges Amid Doubts Over Data 
Kazakhstan Central Bank Holds Interest Rate at 18% as Inflation Pressures Persist 
Japan’s Rising Inflation Strengthens Case for a Near-Term BOJ Rate Hike 
UBS Predicts Potential Fed Rate Cut Amid Strong US Economic Data 
European Stocks Rally on Chinese Growth and Mining Merger Speculation 
Gold Prices Fall Amid Rate Jitters; Copper Steady as China Stimulus Eyed 
Singapore Maintains Steady Monetary Outlook as Positive Output Gap Persists into 2025 
Wall Street Analysts Weigh in on Latest NFP Data 
Global Markets React to Strong U.S. Jobs Data and Rising Yields 
Oil Prices Dip Slightly Amid Focus on Russian Sanctions and U.S. Inflation Data 
RBNZ Cuts Interest Rates Again as Inflation Cools and Recovery Remains Fragile 
Fed Officials Split as Powell Weighs December Interest Rate Cut 
Since January, the EURUSD has essentially been driven by the S&P realized volatility, while US short rates explain it only when the influence of equity volatility is removed.
Fed's fears mean higher yields and vulnerable US equities (strong negative correlation), which implies higher S&P volatility; this, in turn, leads to a lower EURUSD.
Thus, we think that it is wise to fetch 8-9 times leveraging effects between 1.0450 and 1.0750 selling the bottom of the range.
Fundamentally, a December hike would not come as a complete surprise, so that the EURUSD is unlikely to break 1.05.
We, therefore, advocate setting a downside KO at 1.0470, just below the multi-year low at 1.0458 (16 March 2015).
As you could observe the positive skews signify the OTC FX hedging interests towards OTM put strikes, the negative skew drives in downside volatility, so that such a barrier appealingly discounts put options.
Shorting expensive volatility is the smart option trade idea in this scenario. Instead of targeting the exact level where the EURUSD would head in next two months in a bearish scenario, we trade a sub-range, namely the portion of the full range below the 1.08 support.
A digital put is similar to a very tight put spread around the strike so that the option is short vega on the downside.
Well, the execution goes this way:
Buy EURUSD 2m digital put (European style options), strike 1.0750 KO 1.0470 with the indicative offer: 10% (vs 23% without barrier spot ref: 1.1010). The EURUSD option with 2m tenor encompasses the Fed meeting in December.
With the RKO barrier, the exotic option becomes fully short vega, no matter the spot level, which is convenient, as EURUSD 2m implied volatility is trading significantly above the 2m realized volatility.
The risk is limited to the extent of premium, the investors buying a digital put with a knockout cannot lose more than the premium paid in the event of EURUSD touching 1.0470 on expiration (i.e. at any time within the next two months), or trading above 1.0750 in exactly two months.
