FxWirePro: Antipodeans feature in gamma screening and calendar structures ahead of monetary policy season

The RBA and RBNZ are scheduled for monetary policies next week, the Kiwis central bank surprised markets last month adopting an explicit easing bias. This week’s Australian CPI result was a significant surprise, with core inflation dropping to a 3 year low, alongside broad weakness in services pricing. 

While we have been expecting the RBA to cut in July and August, motivated mostly by concerns about the activity data. But with inflation now drifting even further off track, we have brought this forward to cuts in May and June (25bp each), on the grounds that the Bank will be unable to defend projections set showing a return to the target without immediate policy action.

The RBNZ’s shift caused oversensitivity to data prints. With a busy calendar ahead of us we think it is prudent to add defensive gamma in idiosyncratically troubled currencies such as NZD and AUD to short vol portfolios.

In addition to the usual daily realized vol (and exponentially weighted vol – e.g. see here) we also track high frequency, short term, realized vol (hourly) in order to gauge persistency of the realized vol trends as well as for spotting major shifts (refer 1stchart).

The long term performance of the delta-hedged 2M straddles in NZDUSD, NZDJPY and EURNZD tend to succumb to decay (refer 2ndchart). Absent broad-based change in risk sentiment, gamma spikes are likely to continue being short lived and with limited impact on vega tenors. That is supportive of constructing calendar structures. With a P/L beta of about 50% of the outright long gamma, vega neutral (and delta-hedged) calendars are better suited for playing long event risk. The structure exhibits minimal or no decay while providing long gamma exposure. 

The recent heightened sensitivity to the data prints (as witnessed following the Wednesday CPI data print) warranties solid AUD gamma performance, which makes us comfortable expressing the below structures equivalently in AUD as well.

Aussie gyrations to continue / CAD gyrations resurface – position for low decay long AUDCAD gamma via calendars 

We only considered AUD and NZD vs USD and JPY so far. While we find fat left tails in 2ndchart, the fact is that event risk day weights historically tend to leave less upside room in those closely watched currency pairs. 

Especially eye-catching is AUDCAD at the 3M vs. high frequency (hourly) realized vol in 1stchart. 

Elevated hourly realized vol has a good chance of spilling into daily realized vol and consequently generating gamma P/L. 

Moreover, the cross captures not one but two currencies whose policy shifts and political risks are likely to keep the idiosyncratic spot gyrations going. (please be mindful of USMCA ratification, USDCAD upside vulnerability ahead of BoC). 

The preferred expression is in the form of delta-hedged calendars. Vega neutral calendar structures are efficient vehicles in playing long event risk with no decay but with long gamma exposure (refer to 3rd chart). 

Trade tips: Buy 3M AUDCAD straddle 5.9/6.25 vs sell 9M 25D strangle @6.5ch, in vega neutral notionals, delta-hedged. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -46 levels (which is bearish), while hourly NZD spot index was at -64 (bearish) while articulating (at 12:37 GMT). 

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