FxWirePro: Options Straps To Hedge EUR/AUD Ahead of RBA

The action on currency markets yesterday saw the euro remain on the back foot. Once again, weak macro data weighed on the currency. The German ZEW measure of economic sentiment dropped sharply in February. For the Aussie dollar, RBA’s monetary policy meeting is the major event which is scheduled on 3rdMarch, the rates markets are pricing a 5% chance of easing at the upcoming meeting (whole broader consensus is status quo), and a terminal rate of 0.46% (RBA cash rate currently at 0.75%). Australian 3yr government bond yields dropped from 0.72% to 0.70%, 10yr yields from 1.04% to 1.01%.

On the other hand, the euro is likely to suffer from the fact that the ECB will resume its net purchases of bonds. As stated in our recent post, EURAUD has seen a topsy-turvy swings in both minor as well as major trends, the pair has relentlessly been slipping from the peaks of 1.6594 levels to the 1.6132 levels. We have, therefore, lowered our year-end forecast for EURAUD from 1.68 to 1.6550.

OTC Indications and Options Strategy: Please be noted that IV skews of EURAUD are stretched on either side, the positively skewed IVs of 3m tenors are signifying more hedging interests in bullish risks. More bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike up to 1.66 levels. 

Contemplating fundamental and OTC factors as explained above, although it is sensed that all chances of Aussie dollar looking superior over Euro in the near term and vice versa in the medium-term future; we advise to hedge the puzzling swings through below options recommendations.

The execution: Spot reference: 1.6150 levels, buy 2 lots of at the money 0.51 delta call option of 3m tenor and simultaneously, buy at the money put option of 1m tenors. The option strap is more customized version of straddles but instruments slightly biased bullish risks. Courtesy: Sentry & Tradingview