Australian Dollar a Sell, Buy AUD/USD 3M Put: Soc Gen
- Written by: Gary Howes
The Australian dollar is forecast to extend lower by analysts at Societe Generale who have issued a trade recommendation on how to profit from the move. Olivier Korber at Societe Generale writes:
The RBA has not finished cutting interest rates, and markets should refocus on China woes in H2.
AUD/USD is lagging the dovish pricing of rates, the technical picture shows vulnerability and long positioning is stretched.
Given that we expect the next RBA rate cut in July, a 3m trade is the appropriate expiry.
Not only does it encompass the event but also gives the market time to digest the risk and
adjust to potentially lower rates.
The AUD/USD 3m risk reversal is currently trading at -1.9.
Above: Skew well in negative territory inconsistent with directionless volatility (FX Vol Wizard).
Such a negative level would be consistent with ATM volatility naturally rising when the FX rate falls, and vice versa.
However, this negative correlation has not been observed over the past six months.
The correlation is actually slightly positive (ascending slope of the regression line).
As volatility is persistently supported, it is unlikely that further spot decline will increase it even more from there.
The skew too high and should normalise as the option market adjusts to the vol/spot dynamics.
It suggests building a structure selling downside vega.
The trade: Buy AUD/USD 3m put strike 0.7150, knock-out 0.66