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FxWirePro: RBA minutes hint on steady rates to monitor inflation - Deploy Diagonal Credit Put Spreads to monitor AUD/USD swings

The minutes from the November Board meeting were broadly consistent with the narrative from the recent Statement on Monetary Policy, as expected.

The RBA continues to monitor the risks around the labor market, housing market, China, and private consumption, and continues to think that the “appreciating exchange rate could complicate this adjustment”.

Importantly, the assessment of risks around the inflation outlook appears more balanced, with the minutes suggesting to us emerging confidence that the disinflationary pulse has peaked. 

We continue to see the RBA on hold with the cash rate steady at 1.5%over our forecast horizon (to end 2018). 

FX option strategy:

Although AUDUSD has been spiking in the recent past from the lows of 0.7523 to the current 0.7560 levels, the bears of this pair resuming at resistance of 0.7581 (day highs) levels, so hedgers can load up shorts in underlying pair via put options with longer tenors to arrest major downtrend as the selling momentum is intensified by leading oscillators with mammoth volumes.

So it is advisable to initiate Diagonal Credit Put Spread (DCPS) in order to tackle both short-term upswings and major downtrend.

To construction this strategy, we evaluated 1m IV skews with risk reversals of the same tenors, the positively skewed IVs towards OTM put strikes moving in sync with risk reversals bets on bearish risks.

Usually, pondering over the option sensitivity tool, IVs and OTC indications these puzzling could be optimally tackled and attained the trade or investment objectives via theta options of shorter tenors.

As we expect the retest of lows of 0.7440 in the weeks to come amid any abrupt upswings.

For the ease of understanding, we’ve just considered this option strategy with shorts in 1W (1%) ITM put with positive theta or closer to zero while buying 1M (0.5%) OTM put option; the strategy could be executed at a net credit.

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