Implied Vol Falls As Aussie Spot Strengthens

One-month implied volatility on the Aussie dollar/U.S. dollar fell to 13% last Wednesday, down from over 14% the week before, as the Australian currency rallied to its highest level for over a month. Aussie spot rose to USD0.723 last Wednesday, compared with USD0.696 seven days previously, according to a New York-based trader. The shift in the currency's fortunes and respective demand to purchase Aussie calls/U.S. dollar puts, dramatically skewed risk reversals that had been heavily bid in favor of Aussie dollar puts, he added.

While implied volatility on the Aussie dollar remained relatively high, it has eased considerably since hitting 15% early last month and this is largely because of the spot rally, said the trader. While optimism regarding the Australian economy is gaining momentum, concerns are growing about the slow recovery of the U.S. equity market, he said. The Australian dollar will continue to appreciate against the greenback over the coming weeks, he predicted.

Robert Lynch, foreign exchange strategist at BNP Paribas in New York, agreed that the Aussie dollar will grind higher in the short-term, predicting that it could hit USD0.74 in the next few weeks. He expects the Australian currency's fortunes to reverse, however, in the long term. Australia is at the end of its interest-rate cycle while the U.S. still has more room to tighten, he noted. The potential for more retracement in Australia's housing market, as well as the size of the country's current account deficit, will also work against the currency, he said.