FxWirePro: Spot out hawks or doves in RBA and RBNZ - AUD/NZD month ahead and options strategic perspectives

There were again no surprises in the Reserve Bank’s (RBA) minutes of the August meeting. It struck a similar tone to that provided in recent commentary.

On the domestic economy, the RBA maintained its assessment of economic growth “a bit above 3 percent over 2018 and 2019”.  

The RBA reiterated that “the next move in the cash rate would more likely be an increase than a decrease” with the caveat that “there was not a strong case for a near-term adjustment in monetary policy”. We continue to expect that the RBA will leave official interest rates on hold for an extended time.

While the global risk sentiment remained moderately positive, the US dollar lower and major commodities higher amid chatter about stretched positioning, Trump’s complaints Fed Chair Powell isn’t dovish enough, and the looming Jackson Hole monetary policy symposium.

US 10yr treasury yields plunged from 2.87% to 2.82%, while 2yr yields fell from 2.61% to 2.59%. Fed fund futures yields continued to price almost 100% chance of a hike on 26 Sep. FOMC member Bostic said the economy now needs less monetary policy stimulus, would dissent if hikes caused the curve to invert, and has a baseline of one more hike this year.

The Aussie underperformed in the weeks of broad US dollar strength following the FOMC and ECB mid-June meetings but so far in July it has been near the middle of the G10 pack. 

Weighing on AUD have been a pullback in key commodity prices, especially metals, bouts of investor concern over US-China trade tensions and the Fed's ongoing optimism on the US economy.

On the flips side, Australia’s commodity basket continues to outperform NZ’s, as does its economy,
and the RBA’s stance (“next move likely up, not down”) contrast with the dovish RBNZ. This week’s event calendar contains the RBA minutes, Westpac leading index, and Q2 construction work. 

Option Strategy: Options Strips

Combination ratio: (2:1)

Contemplating all the aforementioned fundamental driving forces, the options strips strategy is advocated on speculative grounds. The options strips strategy which contains 3 legs that need to be executed with a view to arresting price downside risks.

The execution: Go long in 2 lots of AUDNZD at the money -0.49 delta put options of 1M tenors, go long 1M at the money +0.51 delta call option simultaneously.

Description: Traders expect increased volatility without taking a view on any particular direction. A strategy usually utilized over significant economic data events and other political events.

Effect of Volatility: Directly proportionate to the volatility, the value of both options premiums would likely to enhance as volatility increases (good) and will decrease as volatility falls (bad).

Please be noted that the strategy likely to fetch positive cashflows regardless of the swings with more potential on downside. Hence, one can deploy this options strategy on hedging as well as speculative grounds.

Currency Strength Index:FxWirePro's hourly AUD spot index is flashing at 45 levels (which is bullish), while hourly NZD spot index was at shy above 44 (bullish) while articulating (at 12:47 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex