Trading Trump’s Tax Plan: Buy … Euros?

On Tuesday, the ECB again exhibited its penchant for leaking market-moving information about monetary policy to Reuters when three unnamed sources tipped a hawkish lean in June.

To be sure, that’s not entirely surprising. With “batshit populist president” risk now seemingly off the table in France thanks to Emmanuel Macron’s daunting lead in the polls ahead of next month’s runoff, Draghi and co. are running out of excuses when it comes to delaying policy normalization (well, unless of course you think core inflation matters).

Indeed, Thursday’s ECB meeting will be eyed closely for any hint of hawkishness and all of the speculation is just adding to the growing list of reasons to be bullish on the single currency, which just hit a fresh five-month high of 1.0951:

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Well, a bit of early morning profit-taking (and subsequent broad dollar strength) notwithstanding, one strategist thinks the best way to play any risk-on event (including Trump’s tax proposal) is now the euro. More below…

Via Bloomberg

Latest rally in the euro post-France vote, coupled with expectations for a hawkish ECB Thursday, push vol skew further up, opening the way for the currency to test 1.1000 handle versus the dollar, Bloomberg strategist Vassilis Karamanis writes.

  • Trump’s expected announcement on his long-awaited tax plan Wednesday does little to boost dollar-long appetite, as bets turn clearly euro bullish
  • One-week 25d risk reversals rise a fourth day and trade at 33bps in favor of EUR calls, favoring upside potential in the pair the most since Nov. 9
    • The gauge closed Tuesday above par for the first time in almost a month
  • Taking out U.S. election noise, this is the widest premium for euro calls since August, at a time when the pair traded higher than 1.1200 handle in spot
    • EUR/USD rises a fifth day, set for its longest winning streak in eight months; up +0.2% at 1.0945
  • Remarkable shift in sentiment also evident through volatility smile analysis on the one-week tenor
  • DTCC data reflects demand for euro upside this week, with options skewed toward euro calls, especially on expiries post-June ECB meeting, where a change in policy tone has become almost base-case scenario for the markets
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