EUR/USD Analysis: Investors seek hedge against downside risks

EURUSD

Open interest in Put options jumps.

EUR/USD risk reversals slide.

The investors are seeking downside protection against a pullback in the EUR/USD, shows the options data for EUR/USD Feb expiry options published by the CME.

EUUG8 Open Interest Change: Current (Jan 26 - Prelim) vs Jan 19

CALL SUMMARY  TOTAL ITM OTM OI CHG OI CHG OI CHG 62,747 2,903 40,828 -590 21,919 3,493 PUT SUMMARY  TOTAL ITM OTM OI CHG OI CHG OI CHG 69,398 14,374 1,433 703 67,965 13,671

Over the last one week (ended Friday), the open interest (OI) or open positions in the put options increased by 14,374 contracts, as opposed to meager 2,903 additions seen in call options.

Put option at 1.22 strike added 4,636 contracts. Meanwhile, 1.27 strike call added only 1,278 contracts. Clearly, the cheap out of the money put options (bearish bets on the EUR) are in demand.

The daily RSI is overbought since mid-January, hence the big jump in the OI in 1.22 strike put is likely to be hedge demand (long puts against long spot positions). Also, Draghi was widely expected to talk down EUR, so it is more likely investors bought puts.

The open interest activity adds credence to one-month 25-delta risk reversals, which show falling demand for EUR calls.

Also, the EUR/USD rally seems to have run out of steam, show technical charts.

The long upper shadows of the previous two daily candles, coupled with the overbought RSI suggests bull market exhaustion and potential for a healthy pullback to 1.22. 

However, the 5-MA and 10-MA trend north on daily, weekly and monthly chart, suggesting the dips could be short-lived.