FxWirePro: Bullish/bearish scenarios, OTC indications and hedging perspectives of AUD/USD

Bearish: AUDUSD below 0.76 if:

1) The unemployment rate moves back towards 5.75%, raising risks that the RBA responds to a weakening labour market;

2) The Fed responds to firm labour market outcomes and above trend growth by delivering a faster pace of hikes than currently expected;

3) China data weaken materially; or

4) The risk markets retrace and vol rises as financial conditions tighten.

Bullish: AUDUSD above 0.80 if:

1) China eases policy and commodities rebound;

2) The Fed’s tightening timeline is severely disrupted by further downside surprises on inflation; or

3) The RBA adopts a more hawkish tone to its communications.

The medium term perspectives: Over the course of Q1 2018, we look for AUDUSD to return to the 0.75 area seen in early Dec 2017.

OTC outlook and hedging perspectives:

While using shrinking IVs of shorter tenors coupled with the positive shifts in bearish risk reversal numbers 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.

Without disregarding the Fed’s rate hiking cycle in 2018, the bearish stance of the pair has been substantiated by bearish neutral risk reversals and positively skewed IVs of 3m tenors which is an opportunity for put longs in long term as the US central most likely to raise the Funds rates by 25 bps.

Accordingly, we had advocated put ratio back spreads 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 rallies by bidding 1m theta shorts, 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 1m (1%) OTM put option (position seems good even if the underlying spot go either sideways or spike mildly), simultaneously, go long in 2 lots of vega long in 3m 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.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 48 levels (which is bullish), while hourly USD spot index was at a tad below 94 (highly bullish) while articulating (at 06:50 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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