FxWirePro: Options Strategies to Trade and Hedge Antipodeans Ahead of RBA

The major driving forces of the pair, at this juncture, are RBA vs RBNZ rate outlooks, and the US-China trade relations. The near-term gyrations in the latter are unpredictable. RBA is scheduled for their monetary policy next week.

Regarding the latter, we expect the RBA in their monetary policy is likely to cut thrice this year, starting with the decision on 4th June, and we expect the RBNZ to remain on hold this year.

FX avenues have largely priced in 3 RBA cuts but they have also priced in 1.5 RBNZ cuts. Thus, there is potential for AU-NZ yield spreads are likely to dip over the next few months if the RBNZ disappoints market expectations. 

The medium perspective: AUDNZD seems to be undervalued, according to interest rates and commodity prices, suggesting it should eventually rise. However, if the RBA cuts 3 times in 2019 and the RBNZ remains on hold, then the cross should remain elevated.

AUDNZD has been oscillating between 1.1425 and 1.0025 levels from last 5 years. The upswings, from the last couple of days, are targeting 1.0725 levels with potential for even higher. 

AU economic data has been strong too (retail sales, trade). There’s little major economic news out this week, apart from consumer confidence, according to interest rates and commodity prices, and there are early signs of a reversion towards fair value which could take the cross towards 1.0750 over the next few weeks.

AUDNZD Strangle Shorts: Contemplating the major trend that has been range-bounded (oscillating between 1.1425 and 1.0025 levels), it is wise to deploy (0.5%) out-of-the-money call and (0.5%) out-of-the-money put options of the 1m tenor. The strategy can be executed at the net credit and certain yields would be derived in the form of the initial premium received as long as the underlying spot FX remains between OTM strikes on the expiration. 

3-Way Straddles Versus ITM Puts: Considering non-directional movements in the underlying spot FX (refer above chart), 3-way straddles are advocated, the strategy comprises of at the money +0.51 delta call, at the money -0.49 delta put options and short in the money put options of narrowed expiry with a view of arresting potential FX risks on either side but capitalizing on minor upswings in the near-term. Hence, on hedging grounds, buy 2m ATM delta puts and ATM delta call of similar tenor and short (1%) in the money put options of 1w are advocated.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 97 levels (which is bullish), while hourly NZD spot index was at 54 (bullish) while articulating (at 09:14 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex