POWER: Polish Power Generation Fell 8.4% YoY in August on Lower Demand

SocGen write that EUR/USD implied vols are trading at the lower bound of the current vol regime, making a mean-reversion toward higher levels very likely. They see the real turning point for markets as the August payrolls release on Sept 5, CPI on Sept 10 and the FOMC meeting on Sept 17, over which they see the dollar as vulnerable.

• Resultantly, they see a compelling entry point to go long EUR/USD vol and/or reload call options. With low volatility and a flat term structure, the market supports positioning at least in the 3-month bucket and selling the dollar via EUR/USD calls.
• Given the skewed smile curve, they see a topside knock-out as an effective way to gain leverage as a move to or beyond 1.20 is possible, while a spike to 1.25 seems less likely over the next quarter.
• As such, they recommend going long EUR/USD 3m volatility swaps and buying a 3m call strike at 1.18 with a 1.23 knock-out.

Long end underperformance in German swap spreads & ASWs this morning, ahead of the impending 20- & 30-Year supply, while the recovery from lows in wider Bunds provides support for the rest of the swap spread term structure.

• Zooming out, Commerzbank note that the cheapening theme “in Bund swap spreads continues. Spreads have been moving in line with outright yields over the past days and are now back at levels seen before Liberation Day. This tallies with the notion that de-dollarisation flows remain absent, bringing German fiscal concerns back into the driving seat. While a near-term correction also seems possible here if the equity sell-off continues, we stick to our view of further swap spread cheapening at the long-end over the coming months”.  

• SX5E (21st Nov) 4650/4600ps, bought for 2 in 6.25k.
• SX5E (21st Nov) 4350/4300ps, bought for 1 in 12.5k.