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Macro and Vol Commentary 

AUDJPY has rallied well since the start of the pandemic and the correction in September and October 2020.

Australia Economic Data

  • The economic recovery continues to benefit AUD; however, momentum in the global economy is moderating as infection rates increase.
  • GDP contracted 2% in 2020, but the RBA expect the economy to grow at 3.5-4% in 2021.
  • The labour market is improving; the participation rate has remained at 66.1% for February 2021, the change in employment was 88,700 jobs in February, with the unemployment rate falling to 5.8%
    • Job vacancies reduced from 23.3% in January to 13.7% in February.
    • The Jobkeeper program finished in March, this creates some uncertainty and could increase unemployment in the near term, but we expect the trend to continue in the longer run.
    • The unemployment rate is expected to rise now, before improving in Q4 2021
  • Inflation remains subdued, but the rise in household goods prices and raw materials could filter into higher prices through cost-push inflation.
    • Wage growth may be subdued in the medium to long term, but as the labour market improves, wage growth is likely to increase.
    • Household consumption is expected to rise as the employment market improves and the savings rate declined from 20% in September.
    • Due to the social assistance payments and the Jobkeeper program ending, household income is expected to decline in the near term.
    • Underlying inflation is expected to remain subdued for 2021 before rising to 1.75% in 2023
    • The CPI weightings in Australia have changed due to the most significant increases in groceries, consumer durables, and new dwellings.
  • The manufacturing PMI was 56.8 in March 2021, down from 56.9 the previous month. The industry is continuing to grow, just at a slower pace.
    • Services PMI has reached 55.5 for March.
    • Composite PMI is the same at 55.5.
  • Australia trade balance has been in surplus in recent months; the balance on goods and services declined by $2,087m in February 2021 to $7,529m.
    • According to the Australian Bureau of Statistics, total exports reached $38,926m in February, down from $526m the previous month.
      • Rural good such as meat and grains were $4,226m, up 7% from January 2021
      • Non-rural – metals and ores, coals and machinery etc. reached $26,780m in February; this is down 3% in February 2021
      • Relations with China have been tense, following the blocking of Australian coal into China in October.
      • Coal exports from Australia to China reached 176,392.5 tonnes in February, but January and March saw zero exports to China.
    • As imports were more significant by $1,563m in February as they reached $31,398m
  • The domestic economy continues to be strong, the low-interest rates and rise in construction activity could see housing starts rebound.
    • Domestic drivers have driven the rebound in the last year, and we expect this to continue. However, in the near term, with employment falling after the job assistance programs have been halted.
    • Material demand will be strong, and we could see housing starts perform strongly in the next few years.
    • Mortgage growth is expected due to the accommodative financial policies.
  • Monetary policy in Australia has continued to support the economy, causing the bank's balance sheet to increase by $175bn. Up to the March meeting, the bank bought $74bn government bonds, and a further $100bn will be purchased following the completion of the initial program.
    • The Term Funding Facility has access to a further $94bn.
    • Members acknowledged the risks of a low-interest environment but kept rates unchanged.
    • The cash rate at 0.1%
    • 0.1% for the yield on 3-year Australian Gov't
    • Term Funding Facility support to credit business, IR on new drawings at 0.1%

Business sentiment in the US and Europe is improving, which will boost Australia's export market. However, tensions with China are high, and the loss of this export market for some industries will impact the economy significantly. Thailand has gone back into lockdown, and China has recently suggested their vaccine success rate is lower; this will create problems for the economy is confirmed. Indeed, the PBOC and Beijing have indicated that stimulus measures will remain the same as last year, and with inflation rising, there are worries that we could see some policy tightening. If these fears continue, we could see demand for safe havens such as the JPY. In terms of the carry trade, this is against the yen as well. With the Australian economy still strong and likely to remain, we favour owning AUDJPY, and the reaffirmation of support at the 50DMA could trigger a break of 85. However, China's relations need to be improved, and the vaccination program more vital to maintain this rally back to 90.

Volatility Commentary

Over the tail end of 2020 and the start of 2021, we saw AUDJPY vols realising lower than implied. We saw a contrast to this with Feb/Mar having some risk-off moves though as market’s slightly calming we’ve seen a return to vol realising lower than implied with AUDJPY spot heading higher. With the RBA holding steady on policy for now and putting out an optimistic outlook on growth for 2021 and 2022 and JPY generally weakening as the Global economy gradually opens up we’d expect to see this trend to continue, we favour positions that benefit from AUDJPY volatility realising lower than implied.

AUDJPY 1-month Implied and Realised Volatility

AUDJPY Trade Idea

  • Sell ATM 3month expiry Straddle for circa 9.0 vols
  • Doing so in 10m AUD a leg (20m AUD total) gives circa 39k AUD Vega
  • Delta hedge short gamma to expiry
  • Note this strategy is only suitable for investors with the capability to run and hedge short gamma positions

Positioning Charts

USDBRL NDO Positioning Data 30/03/2021 - 06/04/2021

The options market saw little activity in the week to April 13th. Options executed remained around spot but there was little cover either of spot which stands at 5.73 at the time of writing. There was one large call option with expiry in June 2021, which has a strike just shy of 6. Options executed around spot are small, and there are options executed to 5.40. The low volume and small notional values suggest a lack of conviction in the market. We do expect more upside cover as spot continues to weaken. 

USDBRL NDO Positioning Data 06/04/2021 - 13/04/2021

USDCNY Vanilla Positioning Data 30/03/2021 - 06/04/2021

In the week to April 13th, options executed traded a wider range on the downside. Put options executed with expiries out to June 2021 traded a range of 6.30-6.55, compared to a range of 6.50-6.60. There is little upside exposure in the near term with little upside cover above 6.70. The options market suggests that the market could consolidate in the near term, but in the long run the greater emphasis on the downside could see the market push back to 6.40. 

USDCNY Vanilla Positioning Data06/04/2021 - 13/04/2021

AUDJPY Vanilla Positioning Data 13/02/2020 - 13/03/2021

The options market once again has been quieter in the month to April 13th. There are little call options executed as investors are likely to belong to the currency due to the carry trade. This also helps to explain the larger amount of put options executed as a hedge against their outright position and volatility. However, the previous month, we saw a larger amount of options executed but in a wide range of 78-85 compared to March 13th -April 13th when the range was 80-85. There are some options with a strike towards 75. Options positioning is skewed due to the carry trade but spot has softened slightly from 85 but we expect the trend to remain intact. 

AUDJPY Vanilla Positioning Data  13/03/2021 - 13/04/2021

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

 

Key Events & Releases

Technical Charts

JP Morgan Global FX Volatility Index

The index has weakened in recent sessions, falling below the 7.40 support level to close at 7.27. The stochastics are seen falling, but %K/%D crossed into a buy signal in the oversold, suggesting we could see a change of trend. Likewise, the MACD is negative and converging on the upside, supporting the outlook for a change to bullish momentum. On the upside, the break above yesterday’s highs could set the prices to test the 50 DMA at 7.62. Conversely, to confirm the outlook for lower prices, the index needs to take out the key support at 7,20, which would signal a strong bearish momentum. A breach of this level could trigger a test at 7.14, and if this support holds, this would help to confirm the double bottom formation, which could lead prices higher in the medium term. 

Dollar Index

The index has weakened below the support level of 92.00; the market closed at 91.80, finding support at 91.66. The fall below the 92.00 level could pave the way for a challenge at trend support at 91.60. The MACD diff is negative and converging, suggesting waning downside pressures for the prices. RSI has risen marginally lower, and %K stochastic is about to break above the %D – a buy signal. On the upside, the index needs to gain a footing above yesterday’s high of 92.32, which could set the scene for 50 DMA at 92.33. The indices paint a mixed picture, but if the index corrects to the upside and breaks through previous day resistance, we could see prices trend higher.

AUDJPY

The pair has improved in the recent sessions and has breached resistance of 100 and 50 DMAs and closed at 83.7. The stochastics are rising, with %K/%D edging towards the overbought, which is a signal of growing buying pressure. The MACD diff is positive and diverging, suggesting we could see a push higher in the near term. The pair needs to hold above the 50 DMA levels before it could target 84.00. On the downside, the break below 83.50 could pave the way for an 83.03 support; prices struggled below that level. The moving averages are edging lower, and a break above them could set the scene for bullish momentum.

Contents

Disclaimer

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