Forex Flash: Trading the AUD over the US “Fiscal Cliff” - ANZ
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AUD/USD
FXstreet.com (Barcelona) - Andrew Salter, FX Strategist at ANZ believes that misconceptions surrounding the expected course of fiscal cliff events could see many market participants misplay their hands over the coming month.
He notes that most commentaries on the fiscal cliff treat a pick up in volatility as an outcome, anticipating a strong sell off to follow failure to secure a deal. However, Salter holds a contrarian suspicion and suspects that a spike in volatility may well not just be a consequence, but an input as well and wholly necessary to properly incentivise political participants. He writes, "Without it, there is no urgency for both sides to temper their divergent posturing and no need for mutual conciliation."
Salter highlights that their core view is for AUDUSD to appreciate on the basis of a cyclical rebound in the Asian economies. However, he notes that there are suspicions elsewhere that AUD's newly found 'safe haven'status could limit its downside in the event of rising risk aversion. However, correlations of returns in AUD compared to the returns of indicators of risk suggest the opposite and that the currency remains sensitive to market perceptions of risk ad to volatility in general. On this basis, he notes that the house expectation is that the currency should depreciate amidst a generalised puck up in volatility,
He continues to question by how much and highlights that his team have been long AUDUSD via risk reversals on the basis of a cyclical rebound in Asia activity and there is no reason to change this outlook because of recent global economic data releases or forecasts of the fiscal cliff itself. Salter expects some sort of 'deal' to be concluded with a moderate fiscal drag into 2013.
Looking to how he will approach the trade, he writes, "with downside risks more evident we remove the risk reversal structure and enter into a long spot AUDUSD position instead, targeting 1.07 with the protection of a long AUD put USD call with a strike of USD0.99 and a term to maturity of two months. On current prices, the profit on the closed risk reversal is 32 USD pips, and we use this towards the 24 USD pips cost of the put (banking 8 USD pips for this transaction).
He notes that most commentaries on the fiscal cliff treat a pick up in volatility as an outcome, anticipating a strong sell off to follow failure to secure a deal. However, Salter holds a contrarian suspicion and suspects that a spike in volatility may well not just be a consequence, but an input as well and wholly necessary to properly incentivise political participants. He writes, "Without it, there is no urgency for both sides to temper their divergent posturing and no need for mutual conciliation."
Salter highlights that their core view is for AUDUSD to appreciate on the basis of a cyclical rebound in the Asian economies. However, he notes that there are suspicions elsewhere that AUD's newly found 'safe haven'status could limit its downside in the event of rising risk aversion. However, correlations of returns in AUD compared to the returns of indicators of risk suggest the opposite and that the currency remains sensitive to market perceptions of risk ad to volatility in general. On this basis, he notes that the house expectation is that the currency should depreciate amidst a generalised puck up in volatility,
He continues to question by how much and highlights that his team have been long AUDUSD via risk reversals on the basis of a cyclical rebound in Asia activity and there is no reason to change this outlook because of recent global economic data releases or forecasts of the fiscal cliff itself. Salter expects some sort of 'deal' to be concluded with a moderate fiscal drag into 2013.
Looking to how he will approach the trade, he writes, "with downside risks more evident we remove the risk reversal structure and enter into a long spot AUDUSD position instead, targeting 1.07 with the protection of a long AUD put USD call with a strike of USD0.99 and a term to maturity of two months. On current prices, the profit on the closed risk reversal is 32 USD pips, and we use this towards the 24 USD pips cost of the put (banking 8 USD pips for this transaction).
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