FxWirePro: Some Intricacy and Optionality of Antipodeans

It is becoming very clear again this morning what really matters for AUD – and that is China. As a result of strong Chinese data, AUDUSD was able to test the 0.72 marks for the first time since February; despite the fact that the minutes of the last rate meeting had caused negative sentiment yesterday. 

China’s GDP figures have attracted a lot of market attention this morning. At first glance, the headline 6.4% year-on-year growth for Q1 2019 doesn’t look shining, especially considering that the sequential quarter-on-quarter growth slowed to 1.4% from 1.5% in Q4 2018.

According to the minutes, the central bankers had principally looked into a rate cut even though the likelihood is seen to be limited at present. The condition for the cut would be that inflation does not rise as expected or that the trend in unemployment starts pointing upwards again. That would constitute a clear signal for the central bank that things are not looking as good for the Australian economy as it is currently expecting. 

Tonight the March labor market data might, therefore, provide significant momentum for AUD.

Antipodean crosses will probably continue to deliver in gamma. We have admittedly been surprised by the firmness of AUD- and NZD-cross gamma in 1Q as the RBA and RBNZ affected unexpected dovish turns in monetary policy. 

Their rate markets may experience continued choppiness in the run-up to actual rate cut delivery or expectations thereof in late Q2/Q3 which should filter through to FX. 

It must be emphasized that gamma outperformance is more likely in AUD and NZD crosses than in USD pairs, since the latter is capped to a greater extent both by the trendless broad dollar as well flows that supply optionality to the market (e.g. supply of AUD puts/USD calls from Australian corporates as a part of hedging flows) and impede runaway FX weakness. Courtesy: JPM & Commerzbank

Currency Strength Index: FxWirePro's hourly AUD spot index is flashing at 48 levels (which is bullish), hourly USD spot index was at 23 (mildly bullish) while articulating at (14:35 GMT). 

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