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Macro and Vol Commentary

AUDUSD pair has been pushing higher in the last couple of weeks before giving up its gains and softening in September ahead of the RBA meeting on Tuesday the 7th. Where will the pair head this week?

Australia’s Economic Backdrop

  • GDP data pointed to moderate growth of 0.7% in Q2, with the performance already seen slowing as the Delta spread began to accelerate and short lockdowns around the country have been introduced
  • Q3 is likely to be negative as a result of strict lockdown measures implemented for most of the quarter.
    • Indeed, the economy has implemented significant containment measures this summer, and the capital city of Sydney has fared the largest amount of cases in the country.
    • As of September 7th, the number of cases continues to climb, beating record highs of 1,545 cases a day.
    • Meanwhile, the number of vaccinations continues to grow, with the number of fully vaccinated adults at 30% of the population, nearly half of the number seen in the EU.
  • As a result, Markit PMIs have been contracting.
    • Services came at 42.9, contracting for the second straight month.
      • Business activity and demand were both under significant pressure, and the employment has fallen for the first time in ten months.
    • Manufacturing came at 51.60, while expansionary, the data is at near the lows last seen in September 2020
      • Elevated prices pressures along with stalled production have put significant pressures on supplier delivery times.
      • On the other hand, workforce numbers increased amid improved confidence for future performance.

Central Bank Decision

  • The RBA has kept the cash rate at a historic low of 0.1% as the country continues to battle the impacts of the pandemic.
    • Indeed, the central bank has long advised that it will not increase the cash rate until inflation rises to a sustainable level of 2-3%, which it does not expect before 2024
  • As of Q2, inflation is at 0.8% m/m and 3.8% y/y, while in line with 2008 highs, it is only marginally above market expectations.
    • The purchase of government bonds, however, will be reduced from A$5bn per week to A$4bn until at least mid-February.
    • The CB had originally planned to review the programme once again in November but decided to extend it to mid-February as a result of slower-than-expected recovery from the delta variant.

Nevertheless, the choice to taper is explained by the bank’s confidence in the economic recovery in the long term once the virus wave abates.
A reduction in bond purchases until mid-February is likely to give the pair a bullish backdrop; however, a continued increase in COVID-19 cases in the country is likely to provide some upside pressure on the AUD in the longer term. Indeed, the US dollar is showing signs of robustness this week despite lacklustre jobs hiring data. Despite the continued spread of the delta variant in Australia, the pick up in vaccinations along with ample continued fiscal stimulus is likely to support the economic recovery until the next meeting in November.

Volatility Commentary

AUDUSD spot has taken hits over the last few months with recent realised volatility rising coming in higher than implied amidst Australia’s summer/third wave of Covid-19 and returning lockdowns. With Australia being returned to lockdown and relatively low vaccination rates which contrast starkly to other developed markets re-opening enabled by higher/fast vaccine rollouts and the RBA continuing to keep rates low we see AUD weakness continuing in the short and medium-term. As such we favour trades benefitting from AUDUSD spot trading lower and realised vols remaining elevated.

AUDUSD 1-month Implied and Realised Volatility 

AUDUSD Trade Idea

  • Buy 1 month put spread
  • Priced in 10m a leg strikes 0.7300 & 0.7100 total cost circa 36k USD
  • Price of 0.73000 put strike alone circa 48k USD

Positioning Charts

USDBRL NDO Positioning Data 24/08/2021 - 31/08/2021

In the week to September 7th there were more call options executed, between the range of 5.20-5.40. The majority of the call options with larger nationals are between 5.30-5.40. Put options also increased in volumes and expire in the near term between 5.10-5.20. The market does lack conviction and this could set the scene for some consolidation. 

USDBRL NDO Positioning Data 31/08/2021 - 07/09/2021

USDCNY Vanilla Positioning Data 24/08/2021 - 31/08/2021

Trades in the week to September 7th saw a bias to the downside with large amounts of puts executed between 6.40-6.50. The USD has weakened in recent weeks and this could trigger a move to the downside for USDCNY. There were few call options executed suggested little conviction on the upside. We expect USDCNY to edge lower in the near term.

USDCNY Vanilla Positioning Data 31/08/2021 - 07/09/2021

AUDUSD Vanilla Positioning Data 07/07/2021 - 07/08/2021

AUDUSD saw a significant amount of put options traded in the week to September 9th. The range is wider with options executed between 0.65-0.73. Calls were largely trading in the same range, but there is less cover above 0.79 in the week to September 9th. This could prompt the market to edge lower in the coming weeks. However, the market has corrected to the upside and puts could be downside cover.

AUDUSD Vanilla Positioning Data 07/08/2021 – 07/09/2021

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 strengthened marginally in the last couple of sessions after rejecting prices below 6.49 once again, with current levels now at 6.64. The stochastics are rising, with %K/%D in the overbought territory, seeing no signs of abating. The MACD diff, however, is positive and converging, suggesting we could see index change trajectory in the near term. A breakthrough of resistance at 100 MA of 6.6694 would confirm further bullish momentum towards to 200 MA at 6.7116. On the downside, a break back below the support of 6.50 could confirm the change of trend. Indicators paint a mixed picture, but the double bottom formation points to further upside momentum in the near term towards 100 MA.

The Dollar Index 

The dollar index has been gaining in the recent sessions, however, found resistance at 100 MA at 92.7865; the index has softened into 92.560 since. The bearish engulfing candle and strong selling momentum outlined by the stochastics and MACD diff suggests that we could see the index break back through the 61.8% fib level at 92.5257, with a downside target of 92.35 in the near term. On the upside, if prices exceed the moving average level and hold firm, this could trigger gains back through to 93.00. The most recent candle and indicators suggest we could see the index decline in the near term.

AUDUSD

The pair has weakened below the support level of 0.74; the market closed at 0.7378, finding support at 0.735. The fall below the 38.2% fib level at 0.7336 could pave the way for a challenge of 200 MA support at 0.7329. The MACD diff is negative and converging, suggesting waning downside pressures for the prices. RSI has risen marginally higher, and %K stochastic broke above the %D – a buy signal, and is now edging out of the oversold. On the upside, the pair needs to gain a footing above 50 MA at 0.7379, which could set the scene for 0.74. The indices point to a change of trend, and the bullish engulfing formation today confirms this outlook.

Contents

Disclaimer

This is a marketing communication. The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Please be aware that, where any views have been expressed in this report, the author of this report may have had many, varied views over the past 12 months, including contrary views.

A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

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COVID cases are rising across the globe as the delta variant spreads, this is causing some nervousness in financial markets, especially with the higher inflation rhetoric. Commodity prices have fallen since the Fed changed their tune inflation, the dollar has stabilised which has also been a headwind to prices. The summer months are traditionally quieter for metals demand which could prompt metals to consolidate. If the delta variant continues to spread, we may see higher levels of stimulus for longer. As things stand stimulus levels are set to be tapered and this could be brought forward if inflation remains high. We expect markets to remain volatile but on lower volume through the summer months.