While we’ve spent all this time debating when the U.S. Federal Reserve will raise the Fed Funds rate for the first time since 2006, there has been little discussion on wether the ECB will continue on its path of QE. Since the last ECB meeting on Oct 22nd (when Mario Draghi hinted to further QE), the Euro has dropped 5.5%, placing it at new 6 month lows, down about 11.5% on the year:
Sadly for U.S. multi-national’s earnings, the Euro and the USD seem like they have a date with parity, and possibly lower if the FOMC is determined to raise rates as the ECB is going the other way:
The Euro obviously looks a tad oversold, and sentiment could not be worse, and to be fair, who really knows what the FOMC will do in Dec, but it seems that what is turning into a consensus trade could be the right trade, especially if you believe this morning’s Oct jobs data gives the Fed cover to raise in Dec.
I am going to wait for a bounce, but the FXE, the etf that tracks the Euro/USD cross looks ripe for a short back to $100 that is very near parity in the currency. Gun to my head with the etf at $105.20, I would look to target $100 in the near term. And this would be the trade:
Trade Idea: FXE ($105.20) Buy Dec 105/100/95 Put Fly for $1
-Buy to open 1 Dec 105 put for 1.61
-Sell to open 2 Dec 100 puts at .32 each, or .64 total
-Buy to open 1 Dec 95 put for .03
Break-Even on Dec Expiration:
Profits: up to 4 between 104 and 96 with max gain of 4 at 100.
Losses: up to 1 between 95 and 96 & between 104 and 105 with max loss of 1 below 95 or above 105.
Rationale: This put fly gives very near the money participation on the downside, while risking less than 1%, or $1 to make up to $4 if the stock were to head to parity between now Mid Dec. But as I said above this sort of trade would be ideal on a couple percent bounce where you would then target the prior 52 week low in the FXE of about $103:[caption id="attachment_58333" align="aligncenter" width="600"] FXE 2yr chart from Bloomberg[/caption]