FxWirePro: EUR/AUD seems to be edgy for further uptrend - Attain skepticism by optimally hedging via diagonal call ladder spread

ECB President Draghi’s speech yesterday contained something for everybody. EUR bulls were pleased about the continued optimism that the improving economy is going to be reflected in the prices and that inflation - supported by a patient and persistent monetary policy - will return to the 2% inflation target. The EUR bears, on the other hand, relied on the comment that uncertainties prevailed as well as volatilities on the financial markets, in particular in the exchange rates, which required close observation.

OTC Outlook and Options Strategy: In the case of optionality, the skews of 1m implied volatilities are projected to slide below the current realized, while the positively skewed IVs indicate bidding for hedging for both upside as well as downside risks in the underlying spot.

Technically, the risk is essentially pricing in the bearish case in the short term trend but the major uptrend still appears to be intact, as it is linked to the possibility of volatile Aussie spikes. We articulate the euro’s technical trend against the Aussie dollar in our recent post (refer the same in our technical analysis section). In the recent history, the underlying EURAUD spot FX have failed break-out the stiff resistance of 1.5678 levels, consequently, slid below 21DMAs. We could foresee some minor dips in the days to come with Italian election risk lining up on the other hand.

Thus, contemplating all the above underlying factors of EURAUD, we like being short vol in short run, selling that premium conditionally on a pay-off benefiting from a lower spot.

At spot reference: 1.5707, prefer a ladder to a call spread ratio as we expect slumps to continue in short run and limited spot appreciation and topside volatility, accordingly buying a 1m call ladders are recommended. Buy 1 lot of ITM Call of 1m tenor, simultaneously stay short in 1w 1 ATM Call and short 1 more OTM call of positive thetas as further rallies seem to be dubious at this juncture (strikes 1.5343/spot/1.5710).

That structure improves the odds compared to a call spread ratio as the maximum and constant profit zone is reached over a range instead of a single spot level.

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 72 (which is bullish), while hourly AUD spot index was at 58 (bullish) while articulating (at 12:25 GMT). For more details on the index, please refer below weblink:

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

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