FxWirePro: Bullish/bearish scenarios of EUR/AUD, OTC Outlook and Options Hedging Strategy

Bullish EURAUD scenarios:

1) Euro growth rebounds to 2.5-3% by mid-2018; 

2) ECB becomes more comfortable with progress on wages and core inflation and softens calendar-based rate guidance 

3) The Aussie unemployment rate moves back towards 5.75%, raising the spectre of RBA rate cuts; 

4) China data weaken materially; or 

5) The risk markets retrace and vol rises as trade war fears escalate. 

Bearish EURAUD scenarios: 

1) ECB delays hiking until 2020 as growth and core inflation struggle. 

2) Excessive fiscal loosening in Italy (2-ppt+), 

3) China eases policy and commodities rebound; 

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

The German economy expanded a seasonally-adjusted 0.5 pct on quarter in the three months to June 2018, following an upwardly revised 0.4 pct growth in the previous period and beating market consensus of 0.3 pct, a preliminary estimate showed. However, the statisticians have surprisingly revised the last three quarters of the past year downwards. Overall, 2018 growth is forecasted to 1.8%. In the H2 of the year, the economy is unlikely to grow more strongly, although the risks posed by the Turkish crisis will remain limited.

Technically, EURAUD on a broader perspective, hanging man pops up at peaks of rallies (at 1.6036 levels) coupled with overbought signal by leading oscillators, while long lasting range-bounded major trend persists (refer monthly plotting) with bullish sentiments in the short run.

OTC outlook and Options Strategy: 

Most importantly, please be noted that IV skews of EURAUD are stretched on either side, the positively skewed IVs of 3m tenors are signifying more hedging interests in both bullish and bearish risks. The bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike upto 1.61 levels and bids for OTM puts show 1.52 levels.

Contemplating fundamental, technical and OTC factors, it is sensed that all chances of Aussie dollar may look superior over Euro in medium term future; we advise to hedge the Euro’s depreciation over AUD through below recommendations.

We’ve been firm to hold on this strategy on both trading as well as hedging grounds, unlike spreads, combinations allow adding both calls and puts at a time in our strategy.

Buy 1m At-The-Money delta put option and simultaneously buy 2 lots of At-The-Money call options of similar expiries. It involves buying a number of ATM puts and double the number of calls. The option strap is more of customized version combination and more bullish version of the common straddle. 

Huge profits achievable with the strap strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a upward move. Hence, any hedger or trader who believes the underlying currency is more likely to spike upside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.

Currency Strength Index: FxWirePro's hourly EUR spot index has shown -113 (which is bearish), while AUD is flashing at -67 (bearish), while articulating at 12:31 GMT. 

For more details on the index, please refer below weblink: 

http://www.fxwirepro.com/currencyindex