The momentum remains negative, the next target 0.7145 (May low).
AUDUSD 1-3 month: Foresee potential below 0.7200 up to 0.70 levels. The US dollar has had an impressive rise since the US election and has a potential to rise further during the months ahead.
The Fed’s assertive tightening projections (hinted 3 hikes in 2017) plus US fiscal expansion should maintain upside pressure on US interest rates and the US dollar.
Against that coal and iron ore are likely to sustain a good portion of their dramatic rises, and economic data should improve in Q4 and Q1, but these forces are subservient to the US dollar’s trend. There’s also the issue of Australia’s AAA rating, seen at risk.
OTC updates and hedging Framework:
Please be noted that the implied volatility of at the money contracts of this APAC pair has been dropped below 10% for 1m expiry and shy above 11% for 3m tenors, while 3m IV skews are signifying the hedgers’ interests in downside risks.
Additionally, the delta risk reversal reveals divulge more interests in hedging activities for downside risks. As a result, we can understand ATM puts have been costlier with the forecasts below 0.72 levels in Q1’2017.
So, the speculators and hedgers for bearish risks are advised to optimally utilize the upswings in short run and bid on 3m risks reversals.
The OTC options market appeared to be more balanced on the direction for the pair over the 3m to 1y time horizon and as a result delta risk reversal for AUDUSD has been maintaining negative which means puts are in higher demand and overpriced comparatively.
Hence, AUDUSD's lower IVs with positive delta risk reversals could be interpreted as the option writer’s opportunity in short run.
Weighing up above aspects, we eye on loading up with fresh longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short term would optimize the strategy.
So, the execution of hedging positions goes this way:
“Short 1m (1.5%) ITM put option as the underlying spot likely to spike mildly, simultaneously, go long in 1 lot of long in 3m ATM +0.49 delta put options and 1 lot of (1.5%) OTM -0.37 delta put of 3m expiry.”


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