J.P.Morgan Identify Long Euribor Vs. Short Eurodollar Midcurve Calls Trade

On a cross market basis, J.P.Morgan “are biased towards an outperformance of Euro area yields versus USD yields. Current volatility differentials between USD and EUR makes it attractive to also position for such an outcome, even in a rally. Specifically, in the sub 2-Year sector.”

• They outline the opportunity to “buy a slightly OTM Euribor 1-Year midcurve call vs. selling a more OTM Eurodollar 1-Year midcurve call at a net credit. Implementing the cross-market trade using OTM Eurodollar midcurve calls offers good protection against any retracement in Fed hiking expectations - not our baseline view. In contrast, in our baseline scenario, we expect some retracement of the current hikes priced in the Euribor curve (we are long Dec ‘22 ECB OIS) thereby making these bullish structures attractive. We highlight that this volatility differential makes the bearish conditional cross market widener (short USD duration versus EUR) punitive and therefore we prefer these conditional structures only via calls. Overall, we recommend buying 100.25 H2 1-Year Euribor calls versus selling 98.875 H2 1-Year Eurodollar call at a small credit to enter into a conditional cross market bull widener at 137.5bp vs. forwards of 153bp.”