FxWirePro: EUR/AUD OTC indications move in sync with technicals – Options Straps for ideal hedge

The GfK consumer sentiment survey in Germany suggested that the downward trajectory in consumer confidence was maintained in the latest month, with the headline index inching lower, from 10.6 to 10.5, the lowest level since last June. The details provided a mixed picture however. Income expectations took a turn for the worse, despite the very the tight labour market and the evidence of higher pay growth. 

And an index capturing consumer willingness to spend eased slightly too to reach its lowest level in thirteen months. In contrast, economic optimism rose for the first time this year, with consumers showing little concern about the rise of protectionism and higher energy prices. 

Among other data releases in the euro area today, the second estimate of French GDP figures for Q2 confirmed the preliminary reading of 0.2%Q/Q growth. It represented an unchanged pace of growth from Q1, but a significant slowdown from last year when the economy expanded by 0.6-0.8%Q/Q each quarter. 

That quarter private consumption declined for the first time in almost two years, by 0.1%Q/Q and French consumer spending data for July, also released this morning suggested, that the weakness persisted into Q3, with spending rising only 0.1%M/M and 0.2%Y/Y. 

While EURAUD on a broader perspective, the long-lasting range-bounded major trend persists (refer rectangular monthly plotting).

Hanging man pops up at peaks of rallies (at 1.6036 levels) coupled with overbought signal by leading oscillators on this timeframe, thereby, bears likely to drag range bounded trend, while both leading indicators (RSI & stochastic curves) on this timeframe signal further weakness.

Most noticeable thing is that, accordingly IV skews of EURAUD are well stretched on either side, the positively skewed IVs of 2m 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 1.65 levels and bids for OTM puts show 1.56 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 47 (which is bullish), while AUD is flashing at -44 (bearish), while articulating at 10:44 GMT. 

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

http://www.fxwirepro.com/currencyindex