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Macro and Vol Commentary

EURUSD has weakened in 2021 as the Euro area has struggled with vaccination supply chains and administration. What is next for the pair?

  • Vaccination data for European countries have struggled to achieve the same administration rates as other major economies. Total vaccines administered in Europe is 40m, as of March 8th. In France and Germany, mostly around 10% of their population have been vaccinated as of March 8th; this is compared to approximately 30% and 35% in the US and UK, respectively.
  • This continues to be what investors are fixated on; however, the narrative of higher yields has also not been kind to the Euro
  • Yields in the US have rallied strongly. However, we expect the back end of the curve to continue to rally with the near-dated yields lagging; this increasing of steepness may not aid EURUSD in the near term.
  • European yields have also rallied, but US yields have increased more.
  • French, German, Italian, Spanish, and Greek have rallied, but French and German yields are still negative at -0.053% and -0.293%, respectively.
  • US 10yr yields have increased by 66% YTD and stand at 1.578% as of March 8th, this is likely to provide some strength for the USD in the near term.
  • Risk appetite has faltered in recent weeks as yields have rallied, stocks have been choppy, and volatility has been made trading that bit harder.
  • Credit and liquidity issues across financial markets have become increasingly prevalent; however, these issues are not so apparent in the FX markets, more in commodities and specifically metals.
  • iTraxx EUR traded 54.56bn on Friday, March 5th
  • CDX Investment grade traded was 26.43bn on March 5th
  • Both trade volumes were high for the week.

Economics Data

  • European data lags behind the US, but Europe will catch up. European Markit Mfg PMI reached 57.9 in February, an increase from 57.7 the previous month.
  • Output and new orders were strong, as employment increased for the first time in two years.
  • Input costs increased and reached a near-decade high
  • Composite and services PMI are contractionary but are improving, standing at 48.8 and 45.7, respectively.
  • Inflation remains to edge higher, with core CPI standing at 1.1% y/y for February, with the month-on-month change at 0.2%
  • Consumer confidence is rising in Europe, up from -0.2 to 5 for March; as consumer confidence improves, we expect aggregate demand to increase in the bloc, which could support inflation from a demand-pull perspective.
  • Recent inflation has come from cost-push due to increases in shipping costs and raw materials.
  • GDP for the bloc is expected to be -5% for Q4 2020, GDP for 2021 is expected to be 3.7%, but this is heavily reliant on the vaccination rate across the bloc
  • Retail sales for March on year on year basis at -6.4%, but -5.9% on an m/m basis
  • Unemployment in the bloc decreased to 8.1%; the furlough schemes remain in place, which will continue to present a false economy. While this is good for consumer confidence, they are more reluctant to spend at this time and will not do so for some time.

The ECB kept their bond-buying program a little changed; net purchases were 11.9bn euros with total PEPP holdings at 878.6bn euros. We expect stimulus levels to remain intact in the longer run, inflation risks are less prominent in Europe, but when consumer demand starts to return, we have more confidence that higher inflation will be sustained. The rally in raw materials will add to input costs, but we remain cautious about calling the recent rally a commodities super-cycle; it seems to be more of a stimulus led vacuum. We do concede that demand is strong, but as the stimulus from China, major governments, and major central banks subsides, we will see. Risk appetite in Europe is muted primarily due to the weaker vaccination program; this needs to pick the pace to instil more confidence in the bloc. Higher yields in the US is boosting appetite for the dollar and reducing demand for stocks and the Euro, the spread between the German 10yr and US 10yr has reached a record today at 187pps. We expect EURUSD to continue to struggle in the near term; we expect risk appetite in the Euro to return but not until the percentage of total population vaccinated catches up and economic data improves.

Volatility Commentary

Over the last few months with vaccine rollouts happening across the EU and US we’ve seen EURUSD vols hold relatively steady with realised vols coming in slightly under implied. We note the European rollout has been slow compared to US and UK roll outs with issues that have popped up between the EU and Pharmaceutical companies around supply, with this in mind we see the potential for short spikes in vol if the European roll-out has further road bumps but expect generally for vols to remain stable and generally realise lower than implied. Given the vaccine gap between the EU and the US, we see potential in the short term for EURUSD to weaken, especially if we see Fed Chair Powell remaining comfortable with the US yields rising (as he seemed to be in his most recent statement).

EURUSD 1-month Implied and Realised Volatility

EURUSD Trade Idea

  • Both priced in 10m EUR a leg and 2-month expiries
  • Buy EURUSD Put with strike 1.1875 for strike circa 98k USD
  • Sell EURUSD Call Spread with strikes 1.2000 and 1.2100 for circa 34k USD
  • Total structure cost circa 64k USD

Positioning Charts

USDBRL NDO Positioning Data 23/02/2021 - 02/03/2021

This week we saw a shift in market sentiment, as investors looked to gain exposure to a higher spot. The majority of the options executed in a range of 5.50-6, where as the previous week the range was 5.30-5.50 and a lot more concentrated. The options executed have a lower notional value which suggests the market lacks conviction at the moment. We expect the market to remain on-trend in the near term. 

USDBRL NDO Positioning Data 02/03/2021 - 09/03/2021

USDCNY Vanilla Positioning Data 23/02/2021 - 02/03/2021

Chart 2 shows are a larger amount of options executed, the range is wider this week than last. The range is slightly higher, at 6.40-6.70. There is a greater emphasis on put options this week, with more exposure below 6.30 in the longer term. Between April and September, there are large amounts of options with high notional values between 6.10-6.50. There is very little upside cover, especially above 6.70. We expect CNY to remain strong and continue to rally. 

USDCNY Vanilla Positioning Data 02/03/2021 - 09/03/2021

EURUSD Vanilla Positioning Data 09/01/2020 - 09/02/2021

This month we have seen less downside cover below 1.15, the range is narrower this month and exposure reduced significantly as you approach 1.30. This range remains the same as we move further away from spot suggesting investors do not believe in an extreme move in the near term.  We expect EURUSD to remain under pressure in the near term but as European risk appetite improves. 

EURUSDVanilla Positioning Data  09/02/2021 - 09/03/2021

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change


Key Events & Releases

Technical Charts 

JP Morgan Global FX Volatility Index

The index has rallied in recent weeks, testing the resistance level at 8.34 before breaking below the 7.80 level. The stochastics are falling in the oversold territory, the MACD diff is negative and diverging, outlining further selling pressures. The 100 DMA at 7.76 is firm support since prices struggled to break below this level and to confirm a continuation of the bearish trend, the index needs to fall completely below to target 200 DMA at 7.59. On the upside, if the index holds above current support, this could trigger a test of 8.00. A break of this level would confirm the trend and prompt a test of resistance at 8.08, the recent highs. The 100 DMA crossing above the 200 DMA suggests a change of trend, however, if the prices do not hold above 7.80, we could see the index soften.

Dollar Index


The index has sold off to test support around 91.36; this level held firm, and the index has rebounded to break above the resistance at the 50 DMA. The indicators suggest we could see higher prices in the near term as the stochastics are positive with the %K edging close to the overbought, the MACD diff about to converge on the upside suggesting higher prices in the immediate term. The three white soldiers formation suggests we could move higher, but the index needs to break above 92.12 and then target 92.50. If resistance at 92.00 holds firm, we may see the index decline back towards 91.50, but the index needs to break below this level in order to suggest a continuation of the downtrend. Superseding this level of support stands at 91.36. We anticipate the uptrend to remain intact.

EURUSD Currency

The pair has consolidated in recent sessions, testing the resistance at 1.1990 before falling below past 50 DMA at 1.1956. Momentum is now on the downside, and we expect this to continue in the near term. The indicators are negative as the stochastics are falling out of the overbought territory, the gap between the indicators suggest momentum is strong on the downside, and the MACD diff is about to converge on the downside. We expect prices to break through support at 1.19 and then target the double bottom at 1.1851, a break of this level would help confirm the reaffirmation of resistance at the 50 DMA. On the upside, appetite above 1.19 could trigger a test of 1.20. The index needs to breach this level and then target 100 DMA resistance at 1.2039 in order to confirm an improvement in market sentiment on the upside. We believe that the near term momentum is on the downside.



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