EUR/USD: Open Positions In Put Options Rise Amid Political Instability In Spain

The sell-off in the EUR/USD appears to have stalled around 1.17 handle, despite political instability in Spain. Most of the market talk still overlooks a serious issue. The complacency is evident from the fact that despite the Spanish crisis, the spread between the Spanish and German 10-year bond yields is steady at the levels seen in the spring.

We, at FXStreet, believe that the conflict between the Catalan and Spanish governments is a serious threat to the Euro.

Options market seems to agree with our view. The data published by the CME shows a big jump in the open positions in the EUR/USD Oct expiry put options.

• The open interest/open positions in the Put options increased by 4845 contracts in the last three trading days.
• The open positions in the Call options have gone up by 2873 contracts since Friday.

It is quite clear that investors fear the political tensions in Spain may escalate to crisis levels and hence are hedging against a sell-off in the EUR/USD pair.

The markets would be forced to scale back the expectations of ECB taper if there is a huge crisis at the heart of one of its biggest economies in the EU.

Spain: Increased odds of an institutional clash?

At the press conference at 19:00GMT today, Catalan President Carles Puigdemont is expected to say that his government would "act at the end of this week or the beginning of next". Meanwhile, King Felipe said, "the Catalan leaders who organized the referendum showed their disrespect to the powers of the state". "They have broken the democratic principles of the rule of law", he added. Things are definitely heating up and could lead to a major institutional clash.

No wonder, the rebound in the EUR/USD from 1.17 ran out of steam around 1.1780 levels. At present time, the currency pair is trading at 1.1755 levels.

As noted earlier, investors have boosted bearish bets on the EUR. Let us look at the total open interest build up in Calls and Puts at different strikes:

• 1.18 Put (in-the-money) has the highest build-up of open positions [7113 contracts]. The chart above also shows a significant build-up of open positions in 1.1750 Put, 1.17 Put, 1.1650 Put and 1.16 Put. 
• 1.19 Call has a max build-up of open positions [3807 contracts]. A strong build-up is also seen at 1.20 Call and 1.22 Call.

Daily Chart - 1.16 is the head and shoulders breakdown target

• Interestingly, the head and shoulders breakdown seen on the chart below presents a downside target 1.1602 [target as per the measured height method].

The tables may have turned - EU is losing appeal, US relatively attractive