FxWirePro: AUD/USD Projections, OTC Outlook, and Hedging Perspectives

AUDUSD in near terms: The upswings is capped at 0.7150 levels, downside risks from the overnight reversal.

The medium-term perspectives: The FOMC’s dovish turn likely to drive AUD’s upside traction in the near-term, while the RBA’s subsequent switch to neutral produced multi-week lows towards 0.70. Meanwhile, Australia’s key export prices have bounced, and US-China trade talks seem likely to result in some form of deal. Westpac’s new view of two RBA rate cuts in H2 obviously hurts the Aussie but data isn’t likely to stoke much more pricing of rate cut risk before August. AUDUSD should continue to see dips towards 0.70 or even below 0.6950 levels by the end of H1'2019.

Technically, the pair has shown bearish potential despite the occurrence of previous month's hammer candlestick which is bullish in nature. While bearish engulfing candle nudges below EMAs that indicates the downswings likely to extend further on a breach below the double top neckline (refer above technical chart).

OTC outlook and Hedging Perspectives (AUDUSD): We will now quickly run you through OTC outlook of AUDUSD, before proceeding further into the options strategic framework.

Please be noted that the positively skewed IVs of 3m tenors signify the hedgers’ interests to bid OTM put strikes up to 0.6950 level which is in line with the above bearish scenarios (refer 1stnutshell).

Please also be noted that mounting numbers of bearish risk reversals and bearish neutral RRs of the 3m tenors that are also in sync with the bearish scenarios refer to 2nd (RR) nutshell.

In a nutshell, AUD OTC hedgers’ sentiments substantiate that their risk mitigating activities for the downside risks have been clear.

Accordingly, diagonal put spreads are advocated to mitigate the downside risks with a reduced cost of trading.

The execution of options strategy: Short 1m (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. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium. 

The rationale: Contemplating all the above factors, we have advocated delta long puts for the long term on hedging grounds, comprising of more number of ITM long instruments and theta shorts with narrowed tenors for 1m shrinking IVs to optimize the strategy.

Theta shorts in OTM put option would go worthless and the premiums received from this leg would be sure profit. We would like to hold the same option strategy as stated above on hedging grounds. Thereby, deep in the money put option with a very strong delta will move in tandem with the underlying. Courtesy: Sentrix, Westpac and Saxobank

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -102 levels which is bearish), while hourly USD spot index was at -28 (mildly bearish), while articulating (at 08:39 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex