FxWirePro: ECB's Negative Rates and Further App Dampen Euro's Growth, OTC Indications to Substantiate - Hedge Euro

FxWirePro: ECB's Negative Rates and Further App Dampen Euro's Growth, OTC Indications to Substantiate - Hedge Euro

10 May 2016, 14:51
Roberto Jacobs
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FxWirePro: ECB's Negative Rates and Further App Dampen Euro's Growth, OTC Indications to Substantiate - Hedge Euro

Euro gained against dollar about 8.24% in last 5 and half months despite ECB’s monetary policy pressures, but central bank’s pressures have hampered euro’s growth pace but confronting to address geopolitical issues.

We see room for cutting the deposit rate to -0.75%, but there is no technical limit per se.

With Draghi signalling that we are close to the limits on the deposit rate, however, further cuts are not likely in the short term.

Importantly, we see little benefit from squeezing banks in an environment of regulatory uncertainty and structural rigidities.

An agreement has been reached on “A new settlement for the United Kingdom within the European Union”. It is a much-diluted set of “reforms” compared with David Cameron’s original aims when he first promised a referendum on Brexit.

Brexit as such, will not satisfy the Eurosceptics who forced David Cameron to make the promise in the first place.

His task to convince the UK public to vote to remain within the EU will not be an easy one. We still see a 45% risk of a Brexit, which could reduce UK and EU growth by as much 1% p.a. and 0.25% p.a., respectively for ten years.

Delta risk reversals of EURUSD with positive ticks creeping up gradually in short run (for next 1W expiries) to signify the hedging positions are well equipped for any abrupt upside risks and downside hedging arrangements over the longer period of time.

As time progresses, UK companies would adjust as new trade agreements were forged, not only with the EU but also with the rest of the world. The negative effect on trade in goods and services would peak at 5% and average 2.5% over the first ten years after exit.

Hedge Euro’s FX risks against these event risks by using following positions of FX options:

Go long in EUR/GBP (3M /1M) diagonal debit call spreads at spot ref: 0.7878 (0.7850-0.8050).

Go short in EUR/USD 3M ATM vs Buy EUR/USD 6M ATM -1.5 vol.

Initiate diagonal put ratio backspreads in EURJPY, go short in EURJPY 2W (1%) OTM put option, go long in 2 lots of 1M 2W ATM +0.49 delta put options.

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