FXWIREPRO: GBP/AUD to Tumble Further, Many Reasons to Hedge Downside Risks - Backspread Best Serves Hedging Objectives

FXWIREPRO: GBP/AUD to Tumble Further, Many Reasons to Hedge Downside Risks - Backspread Best Serves Hedging Objectives

Inflation continues its global trend higher with UK and Sweden following the preliminary German and EU reads higher.

Risk was ‘on’ last night with equities, commodities and yields all in agreement and heading higher. It is thus unsurprising to find NZD and AUD higher.

A little point of interest was that in the dovish IMF report China growth was upgraded by 0.2% to 6.5%, something NZD and AUD are exposed to.

China trade surplus came in at USD29.86 billion in March of 2016, up significantly from USD3.08 billion reported a year earlier but slightly less than market consensus, as exports rose while imports fell.

Exports (YoY) increased by 11.5% to USD160.86 billion, the first growth since June 2015.

Imports fell less than expected by 7.6% to USD122.16 billion.

In February, the country registered a USD32.59 billion trade surplus.

Technically, we kept urging for GBPAUD's weakness ever since the formation of gravestone doji and hanging man patterns in last September and November, now almost within 1-months time frame, it has shown declines of 0.37% (from 1.8706 to the current 1.8636 levels). It is now on the verge of reaching 1.8372 levels (i.e. 50% Fibonacci levels).

Currency hedging strategy: GBPAUD

With this technical reasoning, we recommend arresting further downside risks of this pair by hedging through Put Ratio back Spread instead of strips which involves extra cost.

So, purchase 3M 2 lots of At-The-Money -0.48 delta puts (regards Brexit issues) and short 1w 1 lot of (1%) In-The-Money put option with positive thetas. The short ITM puts funds to the purchase of the greater number of long puts and the position is entered for no cost or a net credit but the risk associated with this strategy is that there is a chance of exercising ITM shorts.

The underlying exchange rate has to make substantial move on the downside for the gains in long puts to overcome the losses in the short puts as the maximum loss is at the long strike.

The material has been provided by InstaForex Company - www.instaforex.com