FxWirePro: AUD/USD bearish forecasts in sync with OTC bids, both RBA and Fed likely to boost projections

We expect AUDUSD to decline through 2017 on skinnier rate differentials and a pull-back in commodity prices.

The Dec-17 target is 0.68, 10% below forwards. The combination of a more high conviction Fed cycle in 2017 and further RBA easing should see policy rate cross-over occur for the first time since the late 1990s.

This will leave minimal carry support for AUD, which is particularly important given its vulnerability to a turn in China’s momentum or adverse developments in global trade.

Bearish: AUD/USD below 0.73 if:

1) The labor market weakens forcing the RBA to respond more aggressively to weak inflation;

2) The Fed responds to animal spirits and bullish survey data by delivering a faster pace of hikes than currently expected;

3) Trade tensions and capital outflows force genuine CNY devaluation.

Accordingly, OTC hedging indications from the diagrams evidencing risk reversals and IV skews are in tandem with the above mentioned forecasts and its rationale.

Please be informed that the nutshell showing risk reversals are bids for the hedging for the downside risks, as a result, puts are on more demands over calls. The negative risk reversals across all tenors are indicating the bearish hedging interests.

Let’s also glance on sensitivity tool for 1-3m IV skews would signify the interests of OTM put strikes that would imply hedging sentiments are for downside risks in the underlying spot FX.