FxWirePro: Aussie gains bank on Chinese data and meager dollar but bearish-neutral risk reversals and IV skews still bid for OTM puts

The Aussie continues to gain background support from solid Chinese bulk prices and the general correction in USD, though a short-term peak appears to be in place at 0.7570. Should risk aversion build, the 0.7430-50 should provide support.

China’s overheated property market showed further signs of cooling in December. We estimate that overall prices moderated to a 19-month low of 0.2% MoM from 0.6% in November. Notably, it is sharply lower from the peak of 2.6% in September.

This is on the back of curbing measures imposed by at least 21 cities since October, including higher down payments on purchases and stricter controls on household permits. For the coming year, we expect the property market to remain soft as the full impact from these measures kick in.

Furthermore, additional measures should not be exactly ruled out given the government’s greater emphasis on restricting speculative purchases. The property market has been a key driver for China’s growth. With the impending slowdown, we expect 2017 GDP to moderate to 6.5% from an estimated 6.7% for 2016.

AUDUSD medium term perspectives: Below 0.7200. The US dollar has had an impressive rise since the US election and has potential to rise further during the months ahead. The Fed’s assertive tightening projections plus US fiscal expansion should maintain upside pressure on US interest rates and the US dollar. Against that coal and iron ore are likely to sustain a good portion of their dramatic rises, and economic data should improve in Q4 and Q1, but these forces are subservient to the US dollar’s trend. There’s also the issue of Australia’s AAA rating, seen at risk.

OTC updates:

Please be noted that even though the risks reversals have not shown any significant shift in hedging sentiments, the IV skews in far month contracts of this APAC pair has been evidencing downside risks still remain intact as OTM puts are the bids on high demand, IVs flashing above 10.5% for 3m expiry for 3m tenors.

While delta risk reversal reveals have been neutral to slightly bearish bias, divulging 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 0.7518 technical levels where we see stiff resistances. So, the speculators and hedgers for bearish risks are advised to optimally utilize the upswings and bid on 3m risks reversals.