For AUD, rate solidity remains a bearish force for the currency, but in 2016 it will be driven by Fed hikes rather than RBA easing (we think the RBA is done).

AUD jumped to 2 week's highs of 0.7051 after the Australian Bureau of Statistics reported that the CPI rose 0.4% in the fourth quarter, this upbeat expectation of 0.3%, boosting Aussie dollar to show little strength against USD.

We reckon that the purchase power of AUD is boosted by the CPI and nothing else and changes in purchasing trends brought a high reading that is viewed as positive for the AUD but would this be sustainable is concerning part.

On the contrary, the greatest difference has been the terms of trade, which we think is bottoming as iron ore prices move within a range and LNG exports rise, thus insulating the trade balance from higher oil prices next year. AUD/USD is forecasted 0.68 in Q2, 0.72 in Q4.

Offsetting AUD/USD long term risks via long AUD/USD 3M ATM straddles financed with AUD/JPY 1Y ATM puts (delta-hedged):

AUD/USD is currently the highest realizing vols among G10 currency space after USDJPY or any EM basket and same is the case with IVs (see IV & risk reversal nutshell), proven one of the improved gamma buys of 2015 also, thanks to an outsized 12% decline in the currency.

Given that implied volatility is one of the most important determinants of an option's price, we use it as a proxy for market demand for a specific option. Thus if we compare implied volatility levels across a series of options, we can get a sense for trader sentiment on a direction for a specific currency pair.

In line with our preference to sell rich yen skews, we advocate financing AUD/USD 3M straddles by selling 1Y 25D AUD puts /JPY calls in vega-neutral amounts.

The technical set-up of the RV is appealing in terms of entry levels, and realized vol spreads look asymmetrically biased in the direction of AUD/USD outperformance.

Selling cross-vol/buying USD-correlation also fits with a market environment that is likely to be dollar-centric in the early stages of the Fed cycle.