FxWirePro: AUD rates, OTC outlook and execution of 2:1 put ratio back spreads to hedge AUD/USD on US Q2 GDP event risk

US Q2 GDP 3rd estimate is projected to be 4.0% annualised, little changed from the 2nd estimate of 4.1%.

The USD generally retains a softer undertone, but the AUD failed to benefit as optimism around trade quickly dissipated. With no top tier data out today, the AUD is likely to continue to move sideways.

Rates: Yields pushed higher again overnight with further steepening seen, in a virtual carbon copy of the previous session. Domestically, the AOFM will issue 1bn of a 10 year bond today, which may pressure the longer end of the AUD rates market.

OTC outlook:

Please be noted 1m implied volatilities (IVs) of AUDUSD flash highest numbers among G10 space despite shrinking IVs with mounting hedging sentiments for FX risks. 

We have advocated delta longs for long term on hedging grounds, more number of longs comprising of ITM instruments and capitalizing on prevailing rallies and shrinking IVs in 1w tenors, theta shorts in short-term to optimize the strategy (as shown below).

The execution of hedging strategy: Short 1w (1%) OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, add long in 2 lots of delta long in 1m (2%) ITM -0.79 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.

Since the trend of this pair has been drifting in range as you can see the rectangular area on daily plotting of above technical charts and such price behaviour has been prolonged from last 4-6 weeks, theta shorts in OTM put option have gone worthless and the premiums received from this leg is sure profit.

Most importantly, please be noted that the positively skewed IVs of 1m tenors signify the hedgers’ interests to bid OTM put strikes upto 0.72 levels (above nutshell). While bearish delta risk reversal also substantiates that the hedging activities for the downside risks remain intact.

Accordingly, we would like to uphold the same option strategy as stated above on hedging grounds. Thereby, deep in the money put option with a very strong delta will move in tandem with the underlying.

Both the speculators and hedgers for bearish risks are advised to capitalize on the prevailing price dips and bid 1m risks reversals to optimally utilize delta long put options with a view of arresting bearish risks.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -182 levels (which is bearish), while hourly USD spot index was at 22 (mildly bullish) while articulating (at 06:41 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex