FxWirePro: Hedging Options for Bullion Market Ahead of US Payroll Data

Today sees the publication of the US labor market report, which is normally seen as a key economic bellwether. Its importance has arguably been lowered by the Fed’s signal that interest rates are unlikely to rise this year. However, with financial markets now pricing in a significant risk of a US rate cut in 2019, today’s report will be an important gauge of whether such a move should be expected.

February’s very weak nonfarm payrolls number of 20k was most probably an outlier, while the three-month average is still not far off 200k. For March, we have penciled in a rise of 195k. Other recent labor market indicators have been mixed but it should be noted that none of these forecast February’s slump in employment growth. We see no change in the unemployment rate at 3.8% and steady annual wage growth of 3.4%.

OTC Updates for Bullion Market:       

Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks. One could see a bullish risk reversal setup. To substantiate the above bullish sentiment, risk reversal (RRs) numbers indicate an overall bullish environment. 

The above risk reversal numbers have been known as a gauge of gold’s underlying market for bullish opportunities. Well, we know that options are predominantly meant for hedging a probable risk event in the future.

Option Strategy: Capitalizing on the prevailing dips of gold price in the short-run and OTC indications, bullish neutral risk reversals of gold, we advocate longs in gold via ITM call options.

Buy 3m XAUUSD (1%) ITM -0.69 delta calls on hedging grounds. If expiry is not near, delta movement wouldn’t be 1 point increase with 1 pip in the underlying movement, which means if the spot moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money call option with a very strong delta will move in tandem with the underlying. 

Alternatively, on hedging grounds, we advocated long positions in CME gold contracts. We now like to uphold the same strategy by rolling over the contracts for April’19 delivery as we could foresee more upside risks. Courtesy: Sentrix & Saxo

Currency Strength Index: FxWirePro's hourly EUR is at 43 (bullish), the hourly USD spot index is inching towards 50 levels (bullish) while articulating at 12:24 GMT. 

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