FxWirePro: Stay firm with AUD/CAD PRBS on rout between commodity currencies

Key fundamental drivers of AUDCAD:

In the short-term, an on-hold RBA, some boost to sentiment on the back of a new Prime Minister and any recovery in global risk appetite will provide some support for AUD. It is also observed that the world dairy prices rose a further 9.9% in last night's Global Dairy Trade auction which is positive note for APAC currencies such as AUD and NZD.

We broke apart Q2 data to find it is likely China is a much larger holder of AUD assets than the average reserve manager. If Chinese reserve drawdown accelerates, we would look for AUD to trade lower and this has been prime cause of concern AUD.

On the flip side, we think is that Canada is showing stronger signs of transitioning to non-commodity, non-housing driven growth while in AU, further currency weakness is needed over the long-term. As a result, with improved crude prices more downside potential seen AUDCAD, currently the spot fx AUDCAD is trading at 0.9375 levels.

Volatility favors option traders:

Traders tend to view the put ratio backspread (PRBS) as a bear strategy, because it employs puts. However, it is actually a volatility strategy. The concept of implied volatility is helping our positions. Options with a higher IV cost more (which means ITM shorting would have fetched you more premiums then). This is intuitive due to the higher likelihood of the market 'swinging' in your favour. If IV increases and you have sold an option, it is bad. A seller wants IV to fall so the premium falls which has happened in our case. You should also note short-dated options are less sensitive to IV, while long-dated are more sensitive.

With IV of ATM contracts of this month expiry being marginally inching lower (at around 9.16%), compare this with IV when we advised this strategy.

So our ITM shorts with shorter expiries have pretty much achieved their objectives, now is the time for longs on 2 lots of At-The-Money -0.50 delta puts and simultaneously expect the underlying currency AUDCAD to make a large move on the downside. We have fundamental reasoning too for this anticipation of CAD's appreciation against AUD, we would come up with that in our upcoming posts.