FxWirePro: Essence and outlook of AUD hedging amid RORO and safe haven tantrums

What has triggered a wave of risk aversion in foreign exchange markets, prompting heavy selling of the Australian dollar against the majors and sharp recoveries in the recent past, which in thin liquidity conditions delivered wild swings in the currency markets overnight.

While the euro is not a safe haven, as a result it rightly suffers against USD and JPY in times of risk-off but is standing up quite well compared with most other G10 currencies. 

Well, there have been many admired FX options trading strategies among FX investors, such as, the carry trade or long-short momentum trades that fetches luring yields during “risk on risk off” (RORO) scenarios.

While the recent risk-on show was momentary. Even if the US side is sounding optimistic regarding the negotiations with China, investors remain sceptical. The current motto is: bird in a hand is better than two in the bush. Which means: profits are being taken for now. Apart from the fact that there is still a risk of the negotiations failing in the end, with the trade conflict between the US and China escalating further after all, there is also uncertainty about the state of the US economy. 

Australia-based asset managers have significant exposure to offshore assets as part of their investment portfolios. Exposure is either held and managed directly, or via third party fund managers. These portfolios regularly hedge these assets back to AUD for local investors.

Both underlying assets and income are hedged to differing degrees, depending on the asset class and hedge policy. 

Hedging is usually done via short-term month-end FX rolls, but we see advantages in maintaining flexibility in timing and tenor of FX rolls to capitalise on favourable moves in cross currency basis markets.

Following the very strong labour market report fears of a recession may have been dispelled for now. 

Nevertheless, the market’s apprehensions are unlikely to have been overcome completely. The fact is made worse by the government shutdown which has meant that the publication of some important economic data had to be postponed. That means that for now the market is more or less left in the dark, which is not exactly supportive of risk appetite either. For now the dollar is able to stand up well in this environment thanks to its status as a safe haven. However, it is likely to be merely a matter of time until this facade begins to crumble more strongly. Courtesy: ANZ

Currency Strength Index: FxWirePro's hourly AUD spot index is flashing at 114 (which is highly bullish), while hourly USD spot index was at -28 (mildly bearish) at 13:01 GMT.

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