Commerzbank Sees Profit In Weak U.S. Performance
Commerzbank Securities is touting several foreign exchange option strategies to take advantage of its expectation that the strength in the U.S. dollar is a temporary blip, sparked by military successes in Afghanistan. Fundamental weakness in the U.S. economy will see a reversion to a lower greenback against the euro, the bank believes.
To take advantage of the expected moves, Commerzbank is recommending clients buy one-year euro knock-in calls against the dollar. The options knock-in at USD0.86 and are struck at USD0.95, according to Jonathan Prole, global head of foreign exchange options in London. For corporate clients who need to buy euros the firm is touting one-year knock-out euro calls, with the knock-out at USD0.855 and a strike of USD0.95. Spot was USD0.88 last Tuesday when the recommendation was made. Strategists at rival firms said this is a logical trade because low volatility has made options with out-of-the-money strikes less expensive. Prole said the premium on these two strategies was 100 basis points. One-month euro/dollar implied vol was 10.4% Tuesday compared to 11.2% a month earlier.
Prole said Commzerbank's knock-out trade would be appropriate for clients, such as a German exporter who has dollars and needs to buy euros. This trade provides a hedge because if the euro appreciates against the dollar the exporter wins on the hedge despite taking a hit on its export position. The firm is recommending notional sizes for the trade of around EUR100 million (USD88 million).