### POV: OPTIONS MARKETS SEE EUR/USD....>

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.