FxWirePro: A Quick Run Through On Antipodean FX Baskets Ahead Of FED & RBA

While equity markets hold on to recent gains, with continued mixed results from US earnings season, month-end USD rebalancing (selling) seems to be dominating FX markets at the moment.

The A$, as a proxy for global risk sentiment, will continue to remain under downward pressure. Global and AU economies are facing unprecedented shocks, and governments and central banks are responding with emergency actions.  Below 0.6200 the next major technical support lies at 0.6000. 

The main event today is still likely to be the FOMC meeting tonight. However, in reaction to the coronavirus they have already cut interest rates to virtually zero and promised unlimited asset purchases. RBA is scheduled for the next week, the common consensus is that .

We urge selling Kiwi dollar (NZD) vs basket of AUD and USD in cash. Adding short NZD in our portfolio vs a basket of AUD and USD exploits a potential relative value play while also keeping a defensive tilt, albeit moderated. Even despite AUD's remarkable retracement from mid-March lows, there are reasons to believe that AUD can extend its recent outperformance against NZD. One justification remains the relative policy divergence in the approach to asset purchases, where RBNZ has thus far distinguished itself as particularly aggressive in meeting the financing need of the government, and are not averse to policies that would be decidedly-negative for the currency (specifically, the possibility that the RBNZ might buy foreign assets). The RBA, by contrast, has begun tapering its purchases. To be sure, relative central bank action is not the foremost driver for currency markets, and each of NZD, AUD and USD will take their cues from the state of the global downturn and eventual rebound. But at least as markets move directionally, increasingly clarity around the nature and intent of asset purchase programs may provide sufficient differentiation for value. 

Trade: Sold NZD vs a 50:50 basket of USD & AUD at an average spot rate of 0.771 (activated at the end of April0, and a stop loss at 0.794. 

Diagonal Put Back Spreads for AUDUSD (activated on 6th April), short 2w (1%) OTM put option with positive theta (position functioned as per the expectations as the underlying spot has rallied considerably), simultaneously, longs in 2 lots of delta long in 3m (1%) ITM -0.79 delta put options. We keep reiterating that the deep in the money put option with a very strong delta will move in tandem with the underlying spot FX, this ITM long is most suitable at this juncture.

Alternatively, we advocated shorting AUDUSD futures contracts of May-month deliveries. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: JPM & Westpac

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