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The debate surrounding ECB monetary policy is gathering momentum again. Of course the criticism of some retired central bankers (primarily from Germany, Austria and the Netherlands) voiced against ECB monetary policy corresponds exactly to what one would have expected of the signatories. However, the comments just like the mainstream point of view’s retorts and the recent criticism from the insurance sector illustrate just how pronounced the differences between the camps are. And they are getting bigger the longer ECB policy does not produce the results desired by the central bankers.
We position ourselves in short among euro bloc where re-sold EURJPY (near-term risks warrant JPY longs via options) and bought
USDSEK intra-week on weak PMIs, we turned tactically neutral EUR even though we retained a bearish bias on EUR, as the domestic primary catalyst for weakening—the ECB— was behind us.
However, we also noted that the impending flash PMIs should be closely watched and that renewed weakness would provide a fresh catalyst to re- sell the euro. In the event, the flash PMIs were abysmal in both manufacturing and services and in our view, warranted increasing short exposure to the euro block (we were already short via NOK).
As a result, we re-sold EURJPY via options (in part because of JPY risk; see discussion below) part funded by selling NOKSEK upside given our view that NOKSEK upside will be capped ahead of year-end.
In addition, also sold SEK vs USD outright. SEK is admittedly cheap on a REER basis which should limit the extent of underperformance on crosses, but SEK is expected nonetheless to partake in broad EUR weakness.
Please be noted that a downgrade to EU’s growth outlook and a change in the ECB call likely warrants a downgrade in the EURUSD forecast, something we will assess in the coming days.
Trade tips:
Buy a 3m EURJPY put spread (116.75/113.75); sell a 3m (1.0875) NOKSEK call. Paid 0.22%. Marked at -0.11%.
Alternatively, ahead of Fed’s Chairman Powell’s speech and Eurogroup’s meeting that are scheduled for this week, we maintain EURUSD shorts via futures of mid-month tenors that have been advocated earlier also with a view of arresting further potential slumps, it is still wise to uphold the same strategy. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: JPM
