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FxWirePro: Delta hedge on AUD/USD proves right in current trend as RBA minutes to prove uneventful but FOMC guidance in focus

The RBA’s unchanged policy actions in the cash rate (on hold at 1.5%) two weeks ago and delivered a statement broadly which was in line with the expectations.

Thus, we doubt the minutes from September’s Board meeting will provide much new information on the monetary policy outlook or how the Bank views recent economic developments.

On the flip side, we think the Fed is unlikely to act in monetary policy decision in this week, the meeting should, however, prepare the ground for a rate hike in December. So, the tone of FOMC statement and the press conference would likely to add pressure in FX markets.

Today, the Aussie dollar bounced higher, up 0.44% at 0.7564 but could not sustain at this levels (exactly 21DMA). The reversal for AUDUSD follows the test of the critical 0.7710/0.7850 zone resulting in an impulsive decline.

Note this area represents a key confluence of resistance including the April high as well as the critical downtrendline from the 2013 peak.

From a medium-term standpoint, the failure against this area is significant as it highlights the potential for a lower-high against the August peak, as well as the April high, and is consistent with the view that this persistent rally phase is finally losing momentum.

Importantly, August confirmed a bearish reversal month and with the decline from this month’s high developing with a trending bias, we are closely monitoring key support levels for signs of a deeper retracement.

The focus is now on the 0.7421/0.7375 support zone which includes the July range lows, the 200-day moving average and the 61.8% retracement of the rally from the May low.

While this area can allow for some short-term pause/retracement, we will be looking for another lower-high to confirm the onset of a deeper corrective phase.

Near term bounces should find resistance at the 0.7553/70 zone. Violations of this support zone would imply an extension into the 0.7290/0.7145 zone which includes the critical May low.

Option Trades:

6M 35D AUD calls/USD puts (delta-hedged): Although no fireworks are expected from the RBA for the rest of the year, AUDUSD spot is substantially rich on our short and long-term fair value models and spec positioning in the currency is now fairly long, so AUD can be a potent vol to be long if either Fed re-pricing or a China rethink forces the valuation gap to narrow in a volatile fashion.

Cost-of-carry is also low in slightly longer-dated expiries along a fairly flat vol curve and with strikes on the weak side of the risk reversal.

AUD realized vols are not stellar, but the implied-realized bleed is no more than 0.5-0.7 % pts., which is palatable for a vega hedge.

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