FxWirePro: AUD/USD Projections, OTC Outlook, and Options Strategy Ahead RBA Monetary Policy

AUDUSD having tumbled from 0.7200 mid-April to the high 0.68s mid-May as soft Australian data and RBA rhetoric pointed to a minimum of 2 cash rate cuts, AUDUSD price action has been a lot more mixed in recent weeks.

Five-year highs on iron ore prices have provided some light amid gloom for other key commodities and record short A$ positions by real money accounts in futures markets suggest plenty of bad news priced in.

We have made no changes to our year-end AUDUSD projections and still foresee AUD at USD0.66 and below levels by Dec-19 on the back of a weaker growth backdrop for the domestic economy and our expectation of further easing from the RBA. However, a near term pause from the RBA, dovish rhetoric from the Fed, sequential improvements in China activity data in June and hints of a near term stabilization in global output may give AUD some near term support.

Contemplating the above factors, 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 still signify the hedgers’ interests to bid OTM put strikes up to 0.6550 level which is still in line with the above bearish trend (refer 1st nutshell). 

Please also be noted that the minor positive shift in risk reversals (RRs) of the shorter tenors and bearish RRs of the longer tenors that are also in sync with the bearish scenarios refer 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 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. 

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 lower IVs to optimize the strategy.

Bearish outlook with rising volatility good for the option holder. 

While put writers would be on the upper hand on theta shorts in OTM put options that would go worthless on lower IVs as the underlying spot FX keeps rising. Thereby, the premiums received from this leg would be sure profit.

We keep reiterating that the deep in the money put option with a very strong delta will move in tandem with the underlying. Courtesy: Sentrix and Saxobank