17 Dec 2014
Optionalizing EUR/USD downside – Nomura
FXStreet (Barcelona) - Jens Nordvig, Research Analyst at Nomura notes that the current volatility in the EUR/USD pair makes holding spot positions challenging, due to which he looks at options to manage the risk of getting stopped out due to a temporary spike.
Key Quotes
“EURUSD has been moving higher. This has mainly been a function of risk aversion, which is pushing rate differentials (probably temporarily) in the euro’s favor and causing investors to close out shorts (look at the correlation to equity markets over the past few weeks.”
“We still like the EURUSD downside trade fundamentally. First, we think Mario Draghi has signalled clearly that unanimity is not needed for QE, making Mr Weidmann’s comments less important. Second, we think the impulse from the Fed will remain hawkish (ie, we think it will stick to the normalization script, so to say). Third, the fact that EURCHF is trading so close to the 1.20 barrier could mean that SNB intervention and subsequent recycling into USD and other currencies is imminent. Fourth, and not least, we expect a more aggressive easing step from the ECB in January, including sovereign QE.”
“From a risk management perspective, however, the current market conditions make holding spot positions challenging, and we are looking to move the risk into option form to avoid being stopped out in a temporary spike higher.”
“Specifically we are entering a 31 January 2015 EUR/USD put spread with strikes at 1.24-1.20 for around 0.64% EUR premium (spot ref 1.2512).”
Key Quotes
“EURUSD has been moving higher. This has mainly been a function of risk aversion, which is pushing rate differentials (probably temporarily) in the euro’s favor and causing investors to close out shorts (look at the correlation to equity markets over the past few weeks.”
“We still like the EURUSD downside trade fundamentally. First, we think Mario Draghi has signalled clearly that unanimity is not needed for QE, making Mr Weidmann’s comments less important. Second, we think the impulse from the Fed will remain hawkish (ie, we think it will stick to the normalization script, so to say). Third, the fact that EURCHF is trading so close to the 1.20 barrier could mean that SNB intervention and subsequent recycling into USD and other currencies is imminent. Fourth, and not least, we expect a more aggressive easing step from the ECB in January, including sovereign QE.”
“From a risk management perspective, however, the current market conditions make holding spot positions challenging, and we are looking to move the risk into option form to avoid being stopped out in a temporary spike higher.”
“Specifically we are entering a 31 January 2015 EUR/USD put spread with strikes at 1.24-1.20 for around 0.64% EUR premium (spot ref 1.2512).”