GBP has been choppy but trendless this year on a messy interplay between Brexit politics and BoE expectations.

Hopes that deterioration in the growth-inflation trade-off might prompt a rate hike as early as the end of this year initially boosted GBP, but these hopes evaporated when the BoE lowered its estimate of NAIRU.

All of this leaves GBP in limbo, albeit our forecast still assumes that a hard Brexit equates to a softer GBP over time. The timing and extent of such depreciation will depend in large part now on the performance of the economy rather than the politics of Brexit which are now reasonably settled.

If we are wrong and the economy remains resilient through the summer, we will need to review the extent of GBP weakness, and indeed it is not inconceivable GBP could appreciate for a time if the BoE does indeed hike.

In the prevailing puzzled trend, you could observe that the momentary bulls of GBPAUD struggle to break and sustain above channel resistance, currently trading in sideways to signal some bearish pressures. We’ve already advised this in our previous technical write up, you can follow below weblink for further reading on our technical write up:

http://www.econotimes.com/FxWirePro-GBP-AUD-bears-keep-check-on-EMAs-in-sloping-channel-leverage-shorts-via-one-touch-binaries-as-shooting-star-pops-up-at-stiff-resistance-537770

Subsequently, we advocate below hedging strategy with cost effectiveness that could hedge regardless of the swings on either side.

Hedging Framework:

3-Way Options straddle versus OTM Call
Spread ratio: (Long 1: Long 1: Short 1)

The execution: Initiate long in GBPAUD 3M at the money vega put, long 3M at the money vega call and simultaneously, Short theta in 1m (1%) out of the money call with positive theta or closer to zero. Theta is positive; time decay is bad for a buyer, but good for an option writer.

Rationale: As you could observe the vega of long leg (buy) call option position is 322.78 USD and it implies that if IV increases or decreases by 1%, the option’s premium would have an impact in an increase or decrease by 322.78 USD, respectively. The Vega of a short (sell) option position is negative and an increasing IV is bad.

Hence, we encourage vega longs and short thetas in the non-directional trending pair but slightly favors bearish strategy as the vega signifies the sensitivity of an option’s value owing to a shift in volatility. It is usually expressed as the change in premium value per 1% change in implied volatility.