Short Term / Sell
Head of FX Strategy
Summary: EURUSD is heavy near range support and may push lower still as the Eurozone outlook sours more quickly than the outlook for the US, where the Fed continues to actively tighten. We trade the risk for lower EURUSD levels via a put option, given very low implied volatility.
Instrument: EURUSD put option, strike 1.1200, expiry May 15
Price Target: Spot price below 1.1000
Market Price: 72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)
As well, given the weakening outlook for global growth, markets may have been a bit premature in celebrating the Fed’s and other central banks’ turn away from a tightening bias as historically, an easing cycle from central banks only arrives at this point in the cycle due to mounting worries of recession and with a backdrop of very weak asset markets. A fresh sell-off in global equity markets could support the US dollar, typically a safe haven from a liquidity angle during times of crisis. A wildcard risk for the euro side of the EURUSD equation is the risk of fresh existential worries driven by populist demands for expanding fiscal stimulus and concerns on sovereign debt funding at the periphery.
Entry: 72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)
Target: Price target: Spot price below 1.1000
Time Horizon: Short-term
The market looks heavy near the ultimate range low posted late last year at 1.1216. Downside optionality looks “cheap” for two reasons. First, it is rather cheap as implied volatilities are quite low relative to the historically range due to the lack of recent volatility in EURUSD and lack of anticipation that anything dramatic is set to happen. EURUSD implied volatility is currently below 6.5% for 3-month options. Second, we have to remember the interest rate carry is rather high for EURUSD and means that the forward price (on Feb 13 with a spot price of 1.1320) is 1.1405 for the May 15 expiry date.
On a longer-term chart, traders may note the lack of notable support levels should the support levels below 1.1200 – perhaps the round, psychological levels starting with 1.1000 the most important if the pair finds itself on the way down.
Consider longer dated options and different strike prices for a different risk/reward profile.
Risks: risk to this trade is 100% loss of the amount paid up front for the option premium.