Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
OTC Derivatives Trading
Summary: EURUSD trades higher after hawkish comments from ECB. Spot has taken out the 1.0650 level and quickly closing in on 1.0750. Vols have started to trade softer but is still supported by the quick move higher in spot. We like to add some medium term trades for higher EURUSD without spending too much premium.
Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.
We had a positive start of the week with risk assets trading stronger after Biden suggested China tariffs are under consideration. Lagarde confirmed rate lift-off in July and exit of negative rates at the end of Q3. EUR trades stronger while USD under pressure, taking EURUSD 150 pips higher yesterday.
We like to follow up on last week trade to buy a 1 week call for a quick move up to 1.0750 with a more long term trade. EURUSD has now had a daily close above 1.0650 and technically it looks like EURUSD is set to continue to trade higher. A close above 1.0750 would open up for a move back up to 1.1400.
EUR vols are slightly lower over the last week as the quick move higher in spot gives support to vols. 1 month is down 0.5 vol over the last week and currently trades around 9.0. Risk reversals are marginally lower but still trades 1.0 vol favoring the downside. A slower grind higher in spot could take vols down 1-1.5 vol and risk reversals moving closer to par.
Below are two alternatives for a medium term bullish EURUSD trade. On the first strategy you will be long EURUSD just above spot with a cap at 1.1200. The risk is on the downside if spot would trade back down to 1.0500. The structure cost around 50 pips compared to 175 pips if you just buy the 1.0800 call. On the second strategy you buy a higher strike in the 3 month and finance about half of the premium by selling a 2 week 1.0650 put. You will be left with a cheap topside call if spot can hold on to the momentum and stay above the 1.0650 support for the next two weeks.
Buy 3 months 1.0800 EURUSD call
Sell 3 months 1.1200 EURUSD call
Sell 3 months 1.0500 EURUSD put
Cost 50 pips
Alternative
Buy 3 months 1.1000 EURUSD call
Sell 2 weeks 1.0650 EURUSD put
Cost 55 pips
Spot ref.: 1.0725
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