As the risk appetite mounting to newer statures, it should be no wonder that the Australian dollar is pushing indefinable bearish levels against many of its fundamentally staggered currency counterparts. This past week, we've observed the Aussie dollar shove well beyond parity against the severely battered Euro (slump from the highs of 1.6053 to 1.5412), but even though slight strength against US dollar on its way to closing out consistent upswings and a second consecutive advance but still well below 21DMA.

As you can make out from the risk reversal nutshell, we've been observing a consistent downside hedging arrangement from last 6 months or so and it has evidenced the price slumps to substantiate hedging computations.

Well, as we know risk reversals relate the volatility paid/charged on out of the money calls versus out of the money puts. An aggressively out of the money (OTM) option is often seen as a speculative bet/hedge that the currency will move sharply in the direction of the strike price. The "Volatility Smile" chart below plots volatility-our proxy for demand-for OTM calls and puts.

To establish that this is not just an anti-greenback move, we have also seen significant strength from the Aussie against the Canadian dollar, euro and British pound and neutral against Swiss franc. That said, the currency may be growing too dependent on the progress of speculative interest and carry trends to sustain a consistent drive. At the first sign of profit-taking or dimmed optimism, the market could quickly pull back this mature trend.

If our anticipation goes right in next year's spot trough 6% below current market, Aussie dollar should once again evidence its grit as a solid vols hold due to its exclusive prominence as a high-beta currency that parks in the sense of Fed monetary cycle and twisters of EM/China crisis.

Therefore, we could continue to foresee the AUD biased lower over the next 3-6 months on the back of modest near term softness in commodity prices and Fed tightening (Q1 in 16 target towards 0.67), and risk reversals are also not deviating from this rationale. Before finding some support later in the year (Q4 in 16 target at 0.71) as the terms of trade trough and the domestic economy continues to rotate away from mining-related activity.