FXO Market Update - RBA delivers hawkish hike
OTC Derivatives Trading
Summary: AUD higher after RBA delivering a surprise hike of 25 bps, expected 15 bps, coupled with a hawkish statement. AUD around 1% higher on the day and vol continues to trade bid. We like to express a bullish AUD view through AUDNZD, to avoid the USD leg, with short vega strategies like covered calls or seagull structures.
Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.
Surprise hike from RBA today when they raised with 25 bps with market pricing a 15 bps hike. This was followed by a hawkish statement driving AUD 1.4% higher against the dollar before paring some gains.
AUDNZD is up close to 1% on the day and is testing the 2020 highs at 1.1045. Next stop would be the 2018 highs at 1.1175. We like to express a bullish AUD view in AUDNZD to avoid the USD leg. We continue to get more negative news out from NZ, latest headline: could take 3-5 years before tourism gets back to pre-covid levels. We think AUD will keep outperform NZD going forward.
AUDNZD vols trades higher with 1 month up 0.6 on the week and currently trades at 7.0 which is the highest level since April 2020 and the peak of the corona crisis. 1 month risk reversal is historically very stable and has trade most of the time between -0.25/+0.25 over the last years, it's currently trading at 0.1 for the topside.
We prefer doing covered calls or buying a seagull call structure instead as normally a call spread as we don’t have any risk reversal to work with.
Sell 1 month 1.1150 AUDNZD (covered) call
Receive 45 pips
Buy 1 month 1.1075 AUDNZD call
Sell 1 month 1.1175 AUDNZD call
Sell 1 month 1.0975 AUDNZD put
Spot ref.: 1.1055
- The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
- Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
- Change: The difference between current price/volatility and where it closed 1w ago.
FX Options Trading:
You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date
If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.
By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited.
If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure.
Learn more about FX Options:Forex Options - Webinars
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.