FxWirePro: What-if scenario analysis of GBP/AUD - Bid 2m skews and deploy 3-way diagonal straddles versus OTM calls to hedge

Bearish GBPAUD scenarios below 1.76 areas given:

1) The BoE passes on a May hike;

2) Core UK CPI continues to moderate and wages remain sticky below 3%;

3) The UK and EU fail to agree on the Irish border, leading to a non-negotiated Brexit);

4) Overt UK balance of payments pressure

5) China easing policy and commodities rebound would be a cushion for the Aussie dollar.

Bullish GBPAUD scenarios above 1.8520 levels given:

1) The UK Parliamentary majority in favor of customs union membership frustrates a hard Brexit;

2) Rejection of the withdrawal bill in parliament precipitates fresh election and/or 2nd referendum.

3) The Aussie unemployment rate moves back towards 5.75%, raising risks that the RBA responds to a weakening labor market.

4) China data weaken materially, and risk markets retrace and vol rises.

Potential trigger events: Brexit talks and EU Summit Jun 28-29, BoE (May 10).

OTC updates:

Please be noted that the positively skewed IVs of GBPAUD oof 2m tenors is well-balanced on either side.

Well, all the above-stated macros standpoints are factored in OTC setups that could propel GBPAUD either side but with more downside potential. Accordingly, we advocate below hedging strategy with the cost-effectiveness that could hedge regardless of the swings on either side.

Hedging Framework:

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

The execution: Initiate long in GBPAUD 2M at the money -0.49 delta put, long 2M at the money +0.51 delta call and simultaneously, short theta in 2w (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.

The Vega of a short (sell) option position is negative and an increasing IV is bad. 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.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into 34 (which is mildly bullish), while hourly AUD spot index was at shy above -42 (mildly bearish) while articulating (at 13:15 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest