The Australian dollar was weaker, AUDUSD continues to slide down 0.45% at 0.7506 despite the RBA left the cash rate unchanged at 1.5% and provided little forward guidance. The Bank’s comments on the housing market were tweaked, with the removal of the comment noting that risks had diminished. This was not surprising given recent evidence of fresh strength in the housing market.

We still see rates on hold at 1.5% at this point, but with the risks tilted towards lower rates given persistently low inflation and falling inflation expectations.

Although no fireworks have been delivered by the RBA for the rest of the year, AUDUSD spot is substantially rich on our short and long-term fair value models and spec positioning in the currency is now fairly long, so AUD can be a potent vol to be long if either Fed re-pricing or a China rethink forces the valuation gap to narrow in a volatile fashion.

6M 35D AUD calls/USD puts (delta-hedged):

Cost-of-carry is also low in slightly longer-dated expiries along a fairly flat vol curve and with strikes on the weak side of the risk reversal.

AUD realized vols are not stellar, but the implied-realized bleed is no more than 0.5-0.7 % pts., which is palatable for a vega hedge. Despite their mild uptick in recent days, AUD vols remain solid value in our view.