FxWirePro: EUR/AUD Bullish/Bearish Scenarios – Deploy Options Strips to Hedge 2m Skews

EURAUD has been oscillating between a tight range of 1.6462 and 1.3655 levels, with the interim bullish sentiments and the major bearish sentiments.

Technically, shooting star pops-up at peaks coupled with overbought pressures signaled by leading oscillators (RSI & Stochastic curves), but bullish engulfing counters, consequently, the major trend goes in a tight range.

Bearish scenarios if: 

1) Euro growth gets stuck below 2% and ECB hikes only in 2020; 

2) A resumption of the EM sell-off boosts USD due to the prevalence of cross-border FX funding in USD, 

3) Extended political protests in France, a populist tide at the European parliamentary elections in May;

4) China eases policy more forcefully and commodities rally

5) Australian unemployment falls below 5% and the RBA adopts a more hawkish tone.

Bullish scenarios if: 

1) Fed ends the hiking cycle but with European growth back above 2% (more 2006 than 2000; 

2) The resolution to US-China trade conflict; 

3) The continued strong CB demand for EUR.

4) The Aussie unemployment rate moves back towards 5.5%, raising the spectre of RBA rate cuts;

5) Financial conditions in China deteriorate materially.

Most importantly, please be noted that IV skews of EURAUD are stretched on either side, the positively skewed IVs of 6m tenors are signifying more hedging interests in both bullish and bearish risks. The bids for OTM calls of this tenor indicate that the underlying spot FX likely to spike up to 1.70 levels and bids for OTM puts show 1.53 levels.

Contemplating fundamental, technical and OTC factors, as shown above, it is sensed that all chances of Euro may look superior over the Aussie dollar in the near term and vice versa in the medium-term future; accordingly, we advise to hedge the puzzling swings through below options recommendations.

The execution: Buy 2 lots of at the money -0.49 delta put option of 3m tenor and simultaneously, buy at the money call option of 1m expiries. The option strip is more of customized version combination and more bearish version of the common straddle. 

Huge profits achievable with the strip strategy when the underlying currency exchange rate makes a strong move either upwards or downwards at expiration, with greater gains to be made with a downward move. Hence, any hedger or trader who believes the underlying currency is more likely to slide downside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.

Currency Strength Index: FxWirePro's hourly EUR spot index has shown -49 (bearish), while AUD is flashing at -98 (highly bearish), while articulating at 08:57 GMT. 

For more details on the index, please refer below weblink: 

http://www.fxwirepro.com/currencyindex