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A glimpse on fundamentals: Just until recent times, the many analysts had been expecting the RBA to sit tight at 1.5% cash rate for some time and the central bank also delivered as anticipated.
But in contrast, the Australian economy unexpectedly declined 0.5 pct in the Q3’2016, compared to an upwardly revised 0.6 pct growth in the June quarter and missing market consensus of a 0.3 pct expansion.
As a result, the RBA’s monetary policy would remain expansionary; a more easing cycle is on cards. In other words, the Aussie central bank members can make the most of the summer break, rate hikes in Australia are not foreseeable for now which would imply that more bearish pressures on AUD.
Please be noted that the implied volatility of at the money contracts of this APAC pair has been dropped below 10% for 1w expiry but still well above 10.5% and 1m 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 where the spot FX market direction of this pair is heading towards 0.7445 and with forecasts of 0.73 levels and below where we see strong supports. While 1w positive risk reversals indicate slight upside risks in short run.
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 IV 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 1w (1%) ITM put option, go long in 1 lot of long in 1m ATM +0.49 delta put options and 1 lot of (1%) OTM -0.36 delta put of 3m expiry.”
