FxWirePro: Aussie economic outlook ahead of RBA monetary policy - Bearish AUD/JPY hedging setup

Bearish AUDJPY scenarios: 

1) The unemployment rate moves back towards 6%, forcing the RBA to respond more aggressively to weak inflation 

2) China data weaken materially

3) The global investors’ risk aversion heightens significantly

4) PM Abe steps down 

The direction of global momentum will be key to watch, with PMIs and key macro releases out in a number of countries. These will set the stage for global sentiment in the FX market. Geopolitical risks will continue to rumble in the background, but an escalation in the US-China trade war can’t be excluded.

In Australia, we will be watching Q2 GDP but how Q3 momentum is shaping will be more important for markets. The RBA’s bias will also be in the limelight. Today the RBA released its money and credit statistics for July. Private sector credit rose 0.4%M/M – up only slightly from 0.3%M/M in June – leaving annual growth steady at a four-year low of 4.4%Y/Y. Growth in housing credit slowed to 5.5%Y/Y, with owner-occupier credit up 7.6%Y/Y but investor housing credit up just 1.5%Y/Y (the latter continuing to reflect actions taken last year by Australia’s regulators). Business credit increase 0.5%M/M causing annual growth to rise 0.2ppt to 3.4%Y/Y.

So far, RBA outlook seems to be on hold for some time which is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.8% to 2.3% range, as long as core inflation remains below 2%.

Hedging framework (AUDJPY): On hedging grounds, risk-averse traders, capitalizing ongoing rallies of the underlying spot FX, we advocate shorting a 3M in premium-rebate notional and buying a 6M 79.500 AUDJPY one-touch put.

Those who wish to reduce cost of hedging; we advocate buying 4M sell 2M AUDJPY diagonal put option spread at 79/82 strike in 1:0.753 notionals.

Vols of 2m tenors are at lower side which is conducive for option writers, hence, we’ve chosen ITM striking put as deep in the money call with a very strong delta will move in tandem with the underlying.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -92 levels (which is bearish), while hourly JPY spot index was at 82 (bullish) while articulating (at 08:52 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex