FxWirePro: Fundamental driving forces, OTC updates and hedging framework of GBP/USD

The Aussie remains pricey compared to short-term fair value estimates as the RBA minutes are released but are unlikely to contain anything surprising given the SOMP was released earlier in the month. RBA Deputy Governor Debelle speaks firstly on “The Outlook for the Australian Economy”, Sydney 9:10 am, and then later at 11:40 am on “Interest Rate Benchmark Reform” at the ISDA forum. 

Bearish GBPAUD scenarios below 1.76 areas given:

1) The BoE passes on a May hike;

2) Core UK CPI continues to moderate and wages remain sticky below 3%;

3) The UK and EU fail to agree on the Irish border, leading to a non-negotiated Brexit);

4) Overt UK balance of payments pressure

5) China easing policy and commodities rebound would be the cushion for the Aussie dollar.

Bullish GBPAUD scenarios above 1.8520 levels given:

1) The UK Parliamentary majority in favor of customs union membership frustrates a hard Brexit;

2) Rejection of the withdrawal bill in parliament precipitates fresh election and/or 2nd referendum.

3) The Aussie unemployment rate moves back towards 5.75%, raising risks that the RBA responds to a weakening labor market.

4) China data weaken materially, and risk markets retrace and vol rises.

Potential trigger events: Brexit talks and EU Summit Jun 28-29, BoE (May 10).

OTC updates:

Please be noted that the positively skewed IVs of GBPAUD of 1m tenors is well-balanced on either side.

Thereby, all the above-stated macro standpoints are factored in OTC setups that could propel GBPAUD either side but with more downside potential. Accordingly, we advocate below hedging strategy with the cost-effectiveness that could hedge regardless of the swings on either side.

Hedging Framework:

3-Way Options straddle versus Call
Spread ratio: (Long 1: Long 1: Short 1)

The execution: Initiate long in GBPAUD 2M at the money -0.49 delta put, long 2M at the money +0.51 delta call and simultaneously, short theta in 2w (1%) out of the money call with positive theta or closer to zero. Theta is positive; time decay is bad for a buyer, but good for an option writer.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into 6 (which is neutral), while hourly AUD spot index was at shy above -57 (bearish) while articulating (at 06:30 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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