FxWirePro: Chinese impact, leverage and real money on net AUD shorts – Capitalize on AUD/USD 6m/1m OTC Bid and deploy 2:1 PRBS

Steering AUDUSD towards 0.68 by mid-2019:

AUDUSD has lost a little more ground over the last month to be down around 1.5% since JPM’s last Key Currency Views, which is in line with the trend monthly rate of decline since January. 

Theassumed stimulus-driven rotation toward somewhat
 stronger domestic demand in China, as policy responds
 to weaker trade outcomes, is key to this call. If we are
right that China’s infrastructure FAI will trough soon (1st chart), Australia’s bulk commodity export markets
 of coal and iron ore will continue to tighten. This is
important given that the terms of trade have already
 rallied over 25%, and is the most important anchor for 0 long-run AUD valuation.

Positioning also suggests AUD may be running out of
catalysts for material downside. Net shorts in AUD 
remain at extreme levels, particularly for leveraged 
investors (2nd chart).

AUDUSD is beginning to hold
in a little better than might have been expected given the Jan-16 shift in sentiment towards the currency, particularly given that AUD shorts are the hedge of choice for EM.

The stabilization near-term has also been forecasted, but foresee the underlying pair at 0.68 levels by mid-2019.

In our baseline projections, downside in AUD is
limited from here. Our global view assumes a relative
recovery in EM growth that will narrow the sense of US exceptionalism that has characterized 2018. 

OTC outlook and Hedging Perspectives (AUDUSD):

Before proceeding further into the strategic framework, let’s just quickly glance through the positively skewed IVs of 6m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.67 levels (refer 1st nutshell). While positive shift in risk reversals are in sync with momentary upswings in the underlying spot fx, bearish delta risk reversal across all tenors also substantiate that the hedging activities for the downside risks (above 2nd nutshell).

Accordingly, we have advocated delta longs for long term on hedging grounds, more number of longs comprising of ITM instruments and capitalizing on prevailing rallies and shrinking IVs in 1m tenors, theta shorts in short-term to optimize the strategy.

Theta shorts in OTM put option would go worthless and the premiums received from this leg would be sure profit.We would like to hold the same option strategy as stated above on hedging grounds. Thereby, deep in the money put option with a very strong delta will move in tandem with the underlying.

The execution of hedging strategy:Short 1m (1%) OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, add long in 2 lots of delta long in 6m (1%) ITM -0.79 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium. Courtesy: JPM, Sentrix and Saxo

Currency Strength Index:FxWirePro's hourly AUD spot index is inching towards 44 levels (which is bullish), hourly USD spot index was at -44 (bearish), while articulating (at 07:42 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex