FxWirePro: Prime driving forces of AUD/NZD bullish/bearish scenarios ahead of RBA monetary policy and options hedging strategies

Bearish AUDNZD scenarios: Foresee below 1.0333 given: 

1) The unemployment rate moves back towards 5.75%, raising 

the spectre of RBA rate cuts; 

2) The Fed responds to firm labour market outcomes and above trend growth by delivering a faster pace of hikes than currently expected; 

3) China data weaken materially; or

4) The risk markets retrace and vol rises as trade war fears escalate.

Bullish AUDNZD scenarios: Foresee above 1.10 given: 

1) China eases policy and commodities rebound; 

2) The Fed’s tightening timeline is disrupted by further downside surprises on inflation; or 

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

Currently, AUDNZDhas been holding above 1.0600 for now.

The medium-term perspectives: Although fundamentals (commodity prices, interest rates, and economic growth) argue the cross should be higher (fair value is 1.12), political risks are a headwind and could remain so until the general election (which will occur no later than May 2019).

Options Trade Perspectives, (AUDNZD spot reference: 1.0642 levels):  

Strangle shorts: As you could observe the swings in the major trend have been oscillating between 1.1423 and 1.0333 levels since June 2015, it is wise to deploy (0.5%) out-of-the-money call and (0.5%) out-of-the-money put options of 1m tenor as shown in the diagram. The strategy can be executed at the net credit and certain yields would be derived in the form of initial premium received as long as the underlying spot FX remains between OTM strikes on the expiration.

3-way straddles versus ITM calls: 

Considering non-directional movements in the underlying spot FX (refer above chart), 3 way straddles are advocated, the strategy comprises of at the money +0.51 delta call, at the money -0.49 delta put options and short in the money put options of narrowed expiry with a view of arresting potential FX risks on either side but capitalizing on minor upswings in the near-terms.

Well, on hedging grounds, execute strategy by buying 2m ATM delta puts and ATM delta call of similar tenor and short (1%) in the money put options of 1w are advocated.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards -5 levels (which is neutral), while hourly NZD spot index was at 62 (bullish) while articulating (at 09:36 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex