Macro and Vol Commentary
The AUD has continued to perform well against the USD, despite the lockdown in Victoria worsening the economic effect of COVID-19 on Australia. But can this strength continue?
- The Victoria lockdown has presented further downside to Australia’s GDP in 2020; we now expect GDP to decline 6% this year and rebound 4.5% y/y in 2021
- This is below some other forecast as there remains uncertainty surrounding demand conditions in the economy, this also is assuming the virus is contained, and the economy manages to avoid another regional lockdown
- Another resurgence would clearly present downside to consumption, investment and employment
- We expect the employment market worsen in the coming months, rising from 7.5% in August to 10% at the end of this year, according to Reserve Bank of Australia (RBA)
- The participation rate stands at 64.7%, and while we wait for employment figures on Thursday, we expect to see a rise in August, this may be by less than June and July which saw employment rise by 200,000 and 114,700 respectively
- Total employment stood at 12.4mn in Q3
- The hourly wage index has increased to 134.4
- We anticipate an increase in employment to fall in Victoria due to the lockdown
- Australia’s savings ratio has rocketed to 19.8% as of June 2020, but retail sales are positive at 3.2% in July.
- According to the RBA, consumption declined by 10% in H1 2020. Outside of Victoria, we have seen consumption recover; online sales have remained elevated which has also supported consumption
- The JobKeeper program has helped support the economy and consumption, and this will continue to March 2021. The programme will not cover all workers, and the criteria will be changed to reduce commitments
- The HomeBuilder package is expected to provide support for the housing market in the near term as incomes and employment could trigger weaker investment.
- Home loans value M/M have increased to 8.9% in July, up from 6.2% previously
- Owner-Occupier loan value has also risen by 10.7% M/M
- Investor loan value M/M was positive at 3.5% in July, down from 8.1% in June
- Consumer inflation expectation for September was 3.5%, but CPI declined by 0.3% Y/Y and -1.9% Q/Q in Q2, and we expect inflation to remain weak going forward
- The balance of payments is improving, in July Australia saw a surplus of a$17.7bn up from A$9bn
- Net exports increased to 1% ratio of GDP
- The trade balance softened in July to A$4,407m from A$8,149m the month prior. This was as a result of a fall in exports by 4% M/M and imports increasing by 7%
- Tourism exports have completely collapsed understandably
- Exports of Iron ore to China reached 230mn tonnes in Q2 and stand at 72.5mn tonnes so far in Q3 (most up to date day)
- Coking Coal exports are totalled 13.64m in July, down from 15.093m tonnes in June
- The trade relationship with China has been with deteriorated, but iron ore has remained in the clear. China has put tariffs on wine, grains and meats
- The barley tariffs could cost Australian farmers $364 as 60% of Australia’s barley exports go to China
- The bank kept rates at 0.25% in their September meeting, with a target yield of 0.25% on the 3yr Gov’t bonds
- The Term Funding Facility will continue to support businesses, the initial allowance of 3% credit had to be drawn by September 2020
- The RBA has increased the size of the TFF to allow for funds to be drawn until June 2021. The additional allowances with authorised deposit-taking institutions will be extended to June 2021, increasing the total amount available to $200bn
- The bank have affirmed their commitment to support jobs and businesses in Australia and keep monetary policy accommodative going forward
Economic conditions in Australia remain uncertain, similar to other countries, and the recent lockdown in Victoria will add downside to GDP. The trade relationship with China continues to escalate, but China continues to purchase iron ore and coal as they support their economy and infrastructure projects. The release of the RBA minutes prompted AUDUSD to strengthen, but the bank did note that a weaker AUD would be beneficial to the economy. The employment market is expected to worsen, and this is a focus of the RBA, however, the risk shift to a more risk-off sentiment at the beginning of this week has prompted USD strength. We anticipate AUDUSD to be supported around 0.6950-0.7000 and once risk appetite returns to the market we could see the trend continue on the upside.
Most Major FX Vols have ticked up as of this week with the week starting on a risk-off tone and a stronger USD. Potential additional election volatility has been thrown in the mix following the death of US Supreme Court Judge RBG and President Trump intending to push through a new SCOTUS pick, alongside rising CV19 cases in Europe and expectations of more restrictions to be put in place (e.g the UK’s Tuesday new measures). With this in case, we’re expecting general macro vol to tick up over the next few weeks.
As mentioned above we’ve seen AUDUSD spot push higher over the last few months amongst a lot of other currencies which appreciated recently against the USD (ie USD weakening across the board). Though as mentioned the economic situation is uncertain with recent lockdown uncertainty, USD weakening seeming to have slowed and potential fallout from further escalation of US & China on trade could add further to downside risk. We’ve seen implied vols remain reasonably steady over the last half and a month though see the implied-realised narrow recently, we favour being slightly AUDUSD long vol/gamma with positions that benefit from AUDUSD spot ticking up further in the immediate term and reverting longer term.
AUDUSD 1-month Implied and Realised Volatility
AUDUSD Trade Idea
- Buy AUDUSD KI Put, 3-month expiry, with put strike of 0.6900 and KI barrier of 0.7250
- Priced in 10m AUD notional has a premium of circa 24k AUD
- For reference, a vanilla equivalent put option would be circa 160k AUD premium
We saw a large shift in sentiment in the market over the last couple of months. Between the dates specified in July and August, we saw an increase in calls above-market executed. The pair has moved higher to 0.7275 at the time of writing. Between the months analysed the range has been much the same, however, in August to September we have seen an increase in near dated put options at or below market. The majority of these options have expiries before January and this could mean we see spot edge back towards 0.70. In neither chart is there much cover above 0.80 or below 0.65, the man difference is that we can see a large increase in long-dated options executed. We expect some more downside coverage as the spot has moved lower, with some strikes more towards 0.65.
AUDUSD August 16th - September 16th
AUDUSD July 16th - August 16th
USDBRL NDO Positioning Data 16/09/2020 - 23/09/2020
This week options executed have favoured the downside, there are little near dated upside call exposure suggesting the options market believes USDBRL will continue to weaken. The range has shifted lower with more put options executed below 5. The majority of put options have an expiry before November, the notional values have been increasing on the downside. There have been some call options executed above te market and especially above 5.50. We expect USDBRL to continue to weaken in the near term.
USDCNY Vanilla Options Positioning Data 16/09/2020 -23/09/2020
USDCNY has strengthened in the week to 23rd of September as we have seen more dollar strength amid a macro selloff. The position data shows an increase in call options between 6.80-7. Near term options, favour the downside but the notional values remain relatively small. There were some near-dated put options executed below the market but the increase in call option volumes suggests we could see the spot market correct to the upside.
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index has continued to strengthen and broke above ley resistance at 9.40 helping to confirm the ascending triangle. The stochastics are rising and the MACD diff is negative but lacks conviction. In order to confirm the outlook of higher prices, the index needs to reaffirm support at 9.40 and then take out key psychological resistance at 10. On the downside, rejection of 9.70 and a break back below 9.40 would indicate a rejection of the ascending triangle. To indicate a change in trend back to 9, the index needs to break below all the moving averages. We anticipate the index to consolidate above 9.50.
The dollar index broke above key trend resistance, last week and protracted buying pressure have kept momentum on the upside. The bullish engulfing candle has been confirmed but the MACD diff is starting to converge on the upside, suggesting waning buying pressure. The stochastics have given a sell signal but are still firmly overbought. The long-legged doji and shooting star candles with rejection at 94.50 could pave the way for a correction in the near term back towards 93.683. On the upside, if the index can hold above 94.50 this could trigger further gains on the upside which would help to confirm the golden cross.
Selling pressure has been strong recently, causing the indicators to weaken considerably. The MACD diff is negative but has started to diverge and the stochastics are bottoming out, the RSI is starting to rise out of oversold. The robust selling pressure looks set to continue in the near term, we could see the market retreat back towards 0.70 where we have found support in recent months. On the upside, in order to regain upside conviction, the market needs to break back above 0.71 and then target 0.7151.