FX Options Weekly

Macro and Vol Commentary

The currency pair gained a footing in recent days ahead of the inflation data from Australia. However, with the CPI figures missing estimates and interest rate decisions from the Fed and RBA a week apart, what is the direction that AUDUSD can go into this week?

Australian Economy

• The Australian economy has had a considerable ramp-up in momentum later on in the year after the relaxation of COVID-19 restrictions and subsequent reopening of borders; however, rising costs and tighter financial conditions are also causing the momentum to slow.
  • Expansion of the service sector continued to slow in June, with the gauge falling to 52.6 from 53.2 as activity and new business rose at the slowest rate in 5 months.
  • Manufacturing PMI, however, expanded in June, growing to 56.2 from 55.7 as new orders continued to expand during the month, giving the performance a boost.
• Household spending has remained robust, growing by 7.9% y/y in May, although the balance sheets are starting to feel the pressure with higher prices and interest rates.
  • The savings rate remains higher than it was before the pandemic, and many households built up buffers and are benefitting from stronger income growth.
  • This provides some more wiggle room for the economy to weather the global economic slowdown.
• Likewise, retail sales remained strong at 0.9% in May, the fifth straight month of growth
• Data shows that China has finished clearing the backlog of Australian coal amounting to over $1bn
  • However, further purchases at similar pace are unlikely as sufficient stock and lower overall demand will mean less need for coal in the near term
  • Total export of coal out of Australia totalled 30.2m tonnes in May, a jump of 15% from the previous month.
• Overall, the economy remains resilient, and labour market conditions remain tight.
  • The unemployment rate was steady at 3.5% in June, the lowest level in half a century.
  • At the same time, job vacancies are high at 480,100, and unemployment is expected to fall further in the months ahead as employers search for candidates in a tight labour market.
• As a result, wages continue to increase from low rates, but not enough to keep up with the rapid increase in prices across the country.
• Inflation in Australia remains high but still below the levels we have seen in other developed economies
  • Q2 CPI figure came at 6.1%, missing the estimates of 6.3%, driven by fuel, food and international holidays.
    
    • The core measure advanced by 4.9%, the highest reading since the series was introduced in 2003.
  • Strong demand, a tight labour market, and capacity constraints in sectors are contributing to further increases in prices.
    • The recent floods are also having an impact.
  • According to the RBA July minutes, inflation is forecast to peak later this year and then decline back to the 3% range in 2023.

RBA

• Australia is set to hike rates once again next week.
  • And while the latest CPI reading was below expectations, the reading is still the highest in 21 years and suggests that RBA will continue to tighten the cash rate from a record low of 0.1% in three moves since May.
    • That prompted the traders to scrap the 75bps possibility from the CB down to 50bps, yielding an implied cash rate of 3.3% by December.
• July RBA minutes pointed out that there is more work to be done to contain inflation and related risks.
• The Board increased its cash rate target by 50bps at the beginning of July, bringing the overall level to 1.35%
  • It also increased the interest rate on Exchange Settlement balances by 50bps to 1.25%.
    • With the interest rate meeting scheduled every month, this gives the Reserve Bank Board more flexibility to adjust their monetary policy stance as they assess the economic impact of data in the coming weeks.
    • The CB’s Chief Lowe stated that a steady series of interest rate hikes are on the way as the CB attempts to soft land the economy, given that most households still have substantial equity to sustain the hikes.

Fed

• The Federal Reserve raised rates by 75bps as it continues its attempts to cool inflation that continues to break new highs
  • The benchmark now stands at 2.25%
  • At the same time, growth is slowing, reflecting the moderation in consumer spending and the housing market, with signs of easing labour market conditions.
  • The Fed is set to continue shrinking its massive balance sheet, phasing in the reductions to an eventual pace of $1.1tr per year.
• With June inflation at 40-year highs of 9.1%, the CB is forced to deliver the largest back-to-back increases in decades before the policymakers step back to assess the outlook for the September decision
  • At the moment, the markets are pricing in a small rate hike of 50bps for September, and we expect the Fed to underscore the significance of policy rates reaching the committee’s estimated neutral rate.

The Australian dollar slipped this week after softer than expected inflation, and in turn, the bets of 75bps in August have been mostly taken off the table. With another aggressive rate hike from the Fed of 75bps, we expect the discrepancy between the two monetary policy actions to weigh on AUDUSD. Retail sales, PPI numbers and building approvals data will be released ahead of the RBA’s monetary policy meeting next Tuesday and should help gauge the impact that four interest rate hikes will have on businesses and households. If these numbers show signs of softening, further weakness in the currency pair is likely.

(Source: Australian Bureau of Statistics, S&P Global, RBA)

Volatility Commentary

Over the last 3 months we’ve seen AUDUSD vols realising slightly over implied as risk off sentiment continues with developed economies continuing to land face first in their attempt to hem in inflation and the R word weighing heavy the markets. As mentioned above it appears that the RBA may slow its rate hike timings, meanwhile in July’s FOMC the Fed continued with it’s 75bps hike with Jay Powell remaining resolute on doing what’s needed to keep a lid on US inflation. With the Fed being under higher pressure to raise rates than the RBA (US inflation running approx. 9% vs Australian inflation at approx.6%) as per above we favour AUDUSD lower and slight long vol positions.

AUDUSD 1-month Implied and Realised Volatility

AUDUSD Trade Idea

• Expiry 3 month

• Sell AUDUSD Call spread, 2mill AUD notional per leg, 0.7000 & 0.7200 strikes for circa 17k USD premium

• Buy European Digital 3 month with 100k USD pay out, Digital level 0.6750 for circa 24k USD premium

• Total strategy premium circa 7k USD premium up front cost

Positioning Charts

USDBRL NDO Positioning Data 14/07/2022 - 21/07/2022

USDBRL indicates that there is more conviction in the market, with options trading up to 5.90. Call options trading above 5.50-5.90 have a high notional and this confirms an improved outlook for USDBRL with spot expected to edge higher. Put options have a lower notional value but the range is wider than the previous week to 5.10-5.50. However options due for expiry in the near term favour the upside and this could trigger gains in spot. 

USDBRL NDO Positioning Data 21/07/2022 - 28/07/2022

USDCNY Vanilla Positioning Data 14/07/2022 - 21/07/2022

Options traded in the week to 21th July favour the upside with very little downside cover. Near term options suggest further upside with near term expiries trade a 6.80-6.90 range due to expire before August 15th. Following August 17th there call options trade to 6.80-7.10 and the range remains at 7.10 out to October 2022. Put options remain low and this could cause a sharp correction if the USD weakens with traders chasing cover. 

USDCNY Vanilla Positioning Data 21/07/2022 - 28/07/2022

AUDUSD Vanilla Positioning Data 28/05/2022 - 28/06/2022

Options show further downside in the near term down to 0.65 with puts holding large volumes which are due to expire before October 15th. Call options traded reach 0.75 and with spot around 0.70, but options due to expire before the end of August have a range of 0.70-0.72 suggesting little appetite for upside gains. 

AUDUSD Vanilla Positioning Data 28/06/2022 - 28/07/2022

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Analysis

JP Morgan Global FX Volatility 

 

The index weakened in recent days, falling below the 11.00 support level to close at 10.87. The prices have found support at 10.83. The stochastics are seen falling, with %K/%D diverging on the downside. The MACD diff is positive and converging, supporting the outlook for a change to bearish momentum. On the upside, the break back above 11.00 could set the prices to test the 50 MA at the 11.15 level before 11.37. Conversely, to confirm the outlook for lower prices, the index needs to take out the 10.83 support, which would signal a strong bearish momentum. At the same time, 50 MA broke below 100 MA and 200 DMA in recent days, a death cross pattern, which is a strong sell signal. We expect to see additional market softness in the near term.

Dollar Index 

 

The dollar index has been softening in recent sessions after finding resistance at 107 and has broken below the longer-term trend support to 106.13. The stochastics have, however, converged on the upside, confirming a strong buying pressure, and the MACD is negative and showing signs of convergence on the upside. If weakness prevails, we could see prices break below the 105 level before 104.04 in the longer term. On the upside, if the support at the 50 MA at 96.25 level to test 96.00. On the upside, if support above this level holds firm, this could trigger gains through 96.50 and target 96.93. The most recent indicators suggest we could see the index rise in the near term, but the index needs to breach the near-term resistance at 200 DMA completely to confirm this.

AUDUSD

 

The pair was well bid, and this triggered gains through all moving averages last week, but resistance at 0.70 has been tested and not broken in the last couple of days, and the pair now trades at 0.72. The stochastics have converged on the downside and are now falling, and the MACD diff is positive and diverging, suggesting growing selling pressures. The reaffirmation of resistance at 0.70 could trigger losses below the trend support to 50 Ma at 0.6862, which would help confirm the bearish sentiment. Conversely, a breach of resistance at the 0.70 level may prompt the bulls to target the 0.7072 level, the highs not seen since mid-June. The most recent gains have been strong, but yesterday’s resistance and the indicators point to growing bearish momentum.