FxWirePro: Wise to give benefit of doubt to Aussie bears – Take glance at AUD derivatives trades radar ahead of monetary policy season

Although Aussie crosses have gained a bit of late, but still struggling to get whole nine yards.

AUDUSD, AUDJPY have been dragging further from the recent price dips. This corrective pullback could extend AUDUSD to 0.6800 levels.

While the sellers bid for further slumps with little pinch of salt in the medium term perspectives. Fundamentally, Q4’2019 included two key positive developments for global risk appetite – the Brexit deal breakthrough and the US-China “Phase One” trade deal. This was enough for the Aussie to reach highs since July. Domestically, Australia continues to print trade surpluses and iron ore’s 3-month highs are backed by a bounce in copper prices (coal remains a weak spot). 

Nevertheless, 0.6950 did not give way and it is easy to imagine US-led trade tensions returning in 2020. Most importantly, we expect the RBA to lower its Australia GDP forecasts and cut the cash rate in Feb, an outcome only about 50% priced. BoJ and BoE’s monetary policies are scheduled for the this week, ahead of these events Aussie should continue to meet sellers with a 0.69 handle over year-end, with risks below 0.67 on anticipation of or delivery of a Feb cut. The 3m skews are also indicating the same bearish risks.

Trading tips: 

Stay long an AUDCHF put spread financed via an AUDNZD put. This is a part hedge to pro-growth trades which shouldn't necessarily lose money if Euro area growth does step up. AUDCHF is vulnerable to RBA QE, while AUDNZD will be supported by pressure on the RBNZ to match the RBA to maintain competitiveness.

Hence, add long in a 6M AUDCHF 0.66 / 0.64 put spread, short a 6M AUDNZD 1.03 put. Cost 38bp AUD (0.6769 & 1.0559). Marked at -8bps. 

Ahead of BoJ’s monetary policy that is scheduled for the this week, we recommend buying a 3m AUDJPY put spread (76.444/72.0) (spot ref: 75.001); sell a 3m 1.0850 AUDNZD call (spot ref: 1.0435). Paid 0.38% (please refer the underlying price charts, as these are moving in sync with the trade advice). 

In yet another trading perspective, at spot reference of AUDUSD: 0.6852 levels, on hedging grounds we advocate shorting futures contracts of mid-month tenors as the underlying spot FX likely to target southwards below 0.66 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Sentry, JPM & Westpac