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FXO Market Update - RBA delivers hawkish hike FXO Market Update - RBA delivers hawkish hike FXO Market Update - RBA delivers hawkish hike

FXO Market Update - RBA delivers hawkish hike

Forex Options

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.

FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
Source: Bloomberg, Blue: AUDNZD spot, Black: AUDNZD 1 month vol

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

Alternative

Buy 1 month 1.1075 AUDNZD call
Sell 1 month 1.1175 AUDNZD call
Sell 1 month 1.0975 AUDNZD put
Zero cost

Spot ref.: 1.1055

Source: Saxo Bank
  • 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.

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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.

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