FxWirePro: Aussie remains edgy amid data forces, AUD/USD hedging framework and strategy to mitigate both short and long-term risks

Markets will closely watch the PMIs for November. Ongoing strength in global growth remains crucial to sustaining risk appetite and keeping volatility low. In the near-term, global sentiment will continue to remain a key driver of the AUD, with no local data due out. Elsewhere, the ECB minutes may drive some euro volatility.

We look for AUDUSD to finish the year around 0.76, so long as markets maintain a very high probability of a Fed interest rate rise in December along with a neutral RBA outlook deep into 2018 and commodity prices remain around recent levels.

OTC outlook and options strategy:

Please be noted that the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.74 levels (refer above diagram). While bearish neutral delta risk reversal indicates that the hedging activities for the downside risks remain intact, and short-term technical trend indicates mild upswings in the near-run (refer technical chart).

Noticeably, ATM IVs of 2w expiries are just shy above 6.9%. Hence, the lower IVs are deemed as the right time to write overpriced OTM puts.

The bearish stance has been substantiated by bearish neutral risk reversals in 1-3m which is an opportunity for put longs in long-term and using shrinking IVs of shorter tenors could be interpreted as an opportunity for writing OTM puts or theta shorts in short run on time decay advantage as the spot FX market reckons the price has downside potential for large movement in the days to come which is resulting option holders’ on competitive advantage.

Accordingly, we had advocated put ratio back spreads a couple of days ago, wherein short leg is functioning as the underlying spot FX keeps spiking.

Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price dips and bidding theta shorts in short run and 3m risks reversals to optimally utilize Vega longs.

On hedging grounds, fresh Vega longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way:

Short 2w (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spike mildly), simultaneously, go long in 2 lots of vega long in 2m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma, and Delta which boosts premium.

Thereby, the above positions address both upswings that are prevailing in short run and bearish risks in long run by vega longs.