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The Reserve Bank of Australia (RBA) is scheduled for its monetary policy to take their interest rate decision tomorrow morning. It is expected that it will keep its key rate on hold at 0.25%. What will be interesting will be what options it presents for a later monetary policy easing: a further rate cut, possibly even negative interest rates, the purchase of government bonds with long maturities or even interventions against the Australian dollar?
Like the large majority of central banks globally the RBA is close to the end of conventional monetary policy possibilities. And like most of the other central banks it is looking for further unconventional tools – in view of the pressure to act it is under. To admit its own inability to act would be the worst option, is the generally perceived conviction among central banks.
The tool of “negative interest rates” is no longer particularly attractive. Further government bond purchases would be possible. Many central banks are more aggressive in this respect than the RBA.
However, the effectiveness of these purchases seems rather limited. To put it mildly. That leaves interventions. Understandably the FX market is worried about that. On the other hand, vice governor of the RBA Guy Debelle sounded sceptical about this tool recently. The RBA is not caught in that tight straight jacket of the G7 central banks who have promised not to use interventions. The G20 corset is much loser in this respect. But Debelle admitted that the fundamental factors leave little scope for a sensible and successful intervention strategy. If valuations are sensical, interventions are rarely successful on a sustainable basis, according to the RBA. Of course, desperate central bankers are capable of a lot – even of nonsensical measures.
As a result, the RBA decision remains a residual risk. This can ease if the RBA does not mention interventions tomorrow. However, this AUD-negative risk factor is unlikely to disappear completely.
At spot reference: 0.7176 levels, short 2w (1%) OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, add long in 2 lots of delta long in 3m (1%) ITM -0.79 delta put options.
We keep reiterating that the deep in the money put option with a very strong delta will move in tandem with the underlying.
Alternatively, on hedging grounds we advocated shorting futures contracts of mid-month tenors, we wish to uphold the same strategy as the underlying spot FX likely to target southwards below 0.69 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Commerzbank