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EURO-DOLLAR: ### POV: OPTIONS MARKETS SEE EUR/USD IN EYE OF THE STORM
-Options trades see little threat to the EUR in the short-term, but are becoming
increasingly bearish on a longer-term horizon. EUR/USD downside protection with
maturities from 3 months to 2 years have become particularly popular over the
last week, as Italy's government takes shape.
-The moves in the 1 year risk reversals have been the largest, dropping to -0.38
for the 1st time since August and falling at a far quicker pace than spot.
-This contrasts with the front-end of the RR curve, which has moved in favour of
calls out to 2 months over the past week. This suggests markets see little
short-term risk in the formation of the Italian government, despite some of the
fringe views of the potential cabinet. This corresponds with FX/FI correlations,
which show the EUR remaining somewhat stable despite the gyrations in Italian
bonds (as pointed out in a POV Monday).
-Risks include a hardline anti-EU cabinet forming quickly, catching those
neutral on EUR/USD in the near-term offside and prompting those EUR/USD put
trades to become even more popular.