FxWirePro: EUR/AUD IVs Tepid As RBA Likely to Replicate ECB Stay With Backspread

FxWirePro: EUR/AUD IVs Tepid As RBA Likely to Replicate ECB Stay With Backspread

26 April 2016, 15:11
Roberto Jacobs

FxWirePro: EUR/AUD IVs Tepid As RBA Likely to Replicate ECB Stay With Backspread

There is rarely a time when you need to act quickly and constantly to earn consistent money.

The ECB has indicated an extra relaxation in monetary policy at its upcoming meeting day after tomorrow. But during December’s under-deliverance highlights the risk of another disappointment, the deteriorating economic outlook should persuade the Governing Council to be bolder this time. We expect both a 20bp cut in its deposit rate and a €20bn expansion of its monthly asset purchases.

On the flip side, AUD seems adjusting higher ahead of RBA's unchanged monetary policy expectations in next week. The statement's description of the AUD was little changed, saying "the exchange rate has been adjusting to the evolving economic outlook." Hence, we continue to expect the RBA to stay on hold, despite its easing bias. Indeed, low inflation conditions suggest that the central bank would be more open to cutting rates if there were deterioration in economic conditions, particularly in the labour market. OTC FX markets:

Keeping above fundamental aspects into consideration, AUD is likely to gain against euro in the weeks to come, but any upswings in abrupt should be capitalized as writing opportunity so as to reduce the hedging cost.

Most importantly, 1W ATM IVs have been sluggish, just at 11.67% as widely expected RBA’s monetary policy to remain stagnant, even 1M implied volatilities are not making much noise, flashing just at 10.77%.

Technically, we spotted out a break below “Neckline of Double Top pattern” at around 1.4696 levels with a bearish candle of big real body on weekly chart, both leading and lagging indicators also signify the ongoing downtrend to prolong further.

Hedging Frameworks:

So, here goes the recommendation this way, at current spot FX is trading at 1.4587, since we expect more dips extending below 1.4445 levels in medium terms, aggressive bears can initiate strategy using ATM puts. But unlike a simple naked puts, backspreads have an extra long that has not only leveraging effects, a short option at a lower strike that caps your reward but also reduces the net cost of the trade. So, the recommendation for now is to go long in 2W ATM -0.49 delta put, long in 1M (1%) OTM -0.39 delta put and simultaneously short 1W (1.5%) ITM put with positive theta. As the strikes have been narrowed, the profit potential is greater, so that the ratio needed is also lower to profit on underlying movement.

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