FxWirePro: RBA maintains status quo not only in cash rates but forecasts, AUD IVs shrinks but bearish hedging sentiments mounting after Aussie central bank

Sometimes you have to repeat something again and again for it to be understood. This is what the Reserve Bank of Australia (RBA) is experiencing at the moment. Since August, the RBA has taken an aggressive verbal stance against the high level of the AUD. At its monetary policy meeting today, the RBA left its policy rate unchanged (at 1.50%) and reiterated that an appreciating AUD would be expected to dampen the RBA’s outlook.

Although all of this was in line with expectations, AUD weakened in the aftermath of the decision. As AUD has depreciated by nearly 3% against the USD since the US Fed’s September meeting, some market participants might have expected the RBA to tone down its rhetoric against AUD strength.

But clearly, that was an overly optimistic expectation given that AUDUSD is still trading close to the highest levels in nearly three years. The AUD appreciation of July isn’t even fully taken into consideration in RBA’s forecasts yet. A first estimate of the impact of the stronger AUD has to wait at least until November when the RBA publishes its next Statement on Monetary Policy. And before that, the RBA won’t change its stance with respect to the AUD which should limit renewed AUD gains.

AUD had required the RBA to talk up the economy locally to spur confidence, while talking it down internationally, to ease market pressure on financial conditions.

Please be noted that IVs are shrinking away with the positively skewed IVs of 3m tenors signifying the hedgers’ interests to bid OTM put strikes upto 0.76 levels (refer above diagram). While 1w negative risk reversals indicate rising hedging sentiments for bearish risks, bearish neutral delta risk reversal divulges the interests in hedging activities for downside risks remains intact amid mild upswings.

Well, the bearish stance has been substantiated by AUDUSD's rising IV in 1-3m which is an opportunity for put longs in long-term and using shrinking IVs of shorter tenors with bearish neutral delta risk reversal can be interpreted as an opportunity for writing OTM puts or theta shorts in short run on time decay advantage as the spot FX market reckons the price has downside potential for large movement in the days to come which is resulting option holders’ on competitive advantage.