FxWirePro: Bullish/Bearish scenarios, and hedging vehicles of AUD/JPY

AUDJPY major trend goes in consolidation phase but for now, has been losing its momentum as stated in our recent write up on technical section. For more reading, visit below weblink:

https://www.econotimes.com/FxWirePro-AUD-JPY-displays-bearish-engulfing-pattern-with-bearish-DMA-crossover-consolidation-phase-in-major-trend-likely-to-go-sideways-947068

Since this early signals of weakness in this pair in conjunction with below fundamental driving forces, prompt us to advocate below option strategies on hedging grounds.

Now, let’s just glance through some fundamental key drivers,

Bearish scenarios:

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

2) China data weaken materially, evidently, we saw the recent Caixin China Services PMI unexpectedly declined to 50.6 in September of 2017 from 52.7 in August, way below market consensus of 53.1. The reading pointed to the weakest pace of expansion in the service sector since December 2015, as both new orders and employment rose at a slower pace and confidence softened. Also, the level of outstanding work at Chinese services companies declined during September, after a four-month sequence of accumulation. China has been major trade partner of Australia, thus, AUD can have an adverse impact on lackluster data prints from China.

Bullish scenarios:

1) China eases policy and commodities rebound

2) The RBA adopts a more hawkish tone to its communications.

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%.

While JP Morgan’s projections of AUDJPY at 81 by Dec’2017, 79 by Q1’2018.

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 84.250 AUDJPY one-touch put.

At spot reference: 87.634, those who wish to reduce the cost of hedging; we advocate buying 4M sell 2M AUDJPY diagonal debit put spread at 90.159/86 strikes in 1:0.753 notionals.

Implied vols are on the higher side which is conducive for option holders, hence, we’ve chosen ITM striking put in the above strategy even though if underlying spot sees any abrupt spikes, it is likely to head southwards in the long run as we agree with JP Morgan’s projections.