FxWirePro: Writing a strangle and 3-way straddles best suitable for AUD/NZD amid RBA and RBNZ Q2 spell

The Reserve Bank of Australia (RBA) maintained the status quo in its monetary policy, leaving key rates unchanged today. As a result, the Aussie dollar could be a beneficiary slightly from this decision as the majority of analysts had widely expected a rate cut. The RBA’s decision could be mainly due to the disappointingly weak inflation in Q1, and the rekindling of the trade conflict between the US and China could easily have become the straw that broke the camel’s back.

However, the RBA continues to maintain that a continued improvement on the labour market will sooner or later cause inflation to return to target levels, in particular as the RBA is likely to be hoping for support for the economy from more expansionary fiscal policies following the elections on 18th May. The limited AUD gains following the decision illustrate the FX market’s continued skepticism though. A rate cut is still seen to be likely and limits AUD’s appreciation potential.

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 1.0685 levels with potential for even higher. The main driving forces at this juncture, is the reversal of NZ-AU yield spreads following the RBNZ’s shift to an easing bias (while the RBA remains neutral). AU economic data has been strong too (retail sales, trade). There’s little major economic news out this week, apart from consumer confidence. 

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: Keeping non-directional movements in the underlying spot FX into the consideration (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. Courtesy: Tradingview.com, Commerzbank

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 42 levels (which is bullish), while hourly NZD spot index was at -96 (bearish) while articulating (at 08:42 GMT).

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