EUR/USD: Buying On Weakness For Maximal Risk Reward

While on a macro scale the German vs US yield spread gives us only one direction to trade, and that’s to the long-side, we need to see a bet coming back in the spread near term to justify purchases of Euros this low. We are at a critical area where the risk-reward to be a Euro bull is obvious. The Italian yield premium, ahead of the budget showdown in the next 24h, is not arguing against this view.

Remember, the daily chart helps my overall bullish synthesis of ideas, following the exhibition of down legs weaker in magnitude since mid-Oct. Besides, as I’ve demonstrated in reiterated occasions, option players, in the new monthly futures contract, have been trailing up OTM puts towards the 1.13–1350 vicinity, essentially telling us that they don’t expect an overextension of the downside or they’d be piling into greater number of insurance contracts via the purchase of cheap options. In other words, the threshold of pain to endure if getting their calls to be long EUR is now greater. Why would they allow that to occur, leaving strikes sub 1.1250 fairly unpopulated?

Besides, the ratio of impl vs hist vol in the EUR/USD is barely above 1:1 in the next 30 days. To me, that suggests that we are still very much in a rotational type of market, and with Euro now at the low end of its range, you should really ask yourself where the highest risk-reward is. Look for areas of liquidity to the downside to keep providing opportunities to fill you into longs if you are a macro player. Short-term, with 2 cycles down confirmed, I wouldn’t be surprised if we complete a third and final one, which may coincide around the time of the ECB policy meeting outcome, which may see the perfect opportunity to take out further stop losses bottom-side and clean the order book before an expected turnaround in fortunes for the Euro.