On EUR/USD, spot has traded a 1.29 handle in each of the last 10years. 2014 is not the moment to break the pattern, given the skew ofbig picture macro risks, from slowly pricing US rate hikes in the shortendof the USD yield curve, to possible EUR disinflation risks. Thisfavors buying downside strikes, though some may prefer waiting outQ1 for better levels given the likely benign risk environment and scopefor minor USD slippage in Q1. If spot gets to 1.40, 1yr breakevens willbe near 1.32 and 1.49, leaving the downside breakeven well withinrange. In contrast the upside will be far beyond what fundamentalscan justify, not least because such EUR strength will exacerbate disinflation trends. Short EUR/USD risk reversal exposure is seen asparticularly attractive, given the extent to which EUR/USD valuationsshould act as an upside constraint. Note, recently EUR/USD riskreversal skew has not followed spot higher which often is a signal of aturning point in spot.
Read the full report: FX Daily
Deutsche Bank