Traders entered one- to three-month U.S. dollar/Aussie dollar straddles last week, hedging against a depreciation in the Aussie dollar, said a trader in Melbourne. Typical trades entailed buying 30 delta out-of-the-money Aussie dollar puts and selling 20 delta out-of-the-money Aussie dollar calls, he said. One-month implied vol jumped Tuesday night from 13.1% to 13.8% after the Australian dollar weakened from USD0.5310 to USD0.5215 in the same period, having hovered at around USD0.53 for much of the previous week. The Aussie dollar depreciated as the euro weakened against the U.S. dollar, he added, noting that it has been tracking the common currency for well over six months. One-month risk reversals favored Aussie puts.
The trader predicted that any drops below USD0.52 would be only short-term. Most deals were in notionals of AUD50-100 million, but a few of the spread plays were as large as AUD200-300 million, he added.
Ron Leven, currency strategist at Lehman Brothers in Tokyo, said that while the Aussie has been tracking the euro for nearly a year there is still no easy explanation for this phenomenon. Some strategists note that the Australian dollar has always been sensitive to world growth, depreciating when growth drops. Because the euro has similar characteristics, the two currencies tend to move together. Others argue that both are falling victim to a legacy of high bond yields compared with U.S. bonds. Five to ten years ago, Australian and European bonds offered much higher yields than U.S. bonds, but now they are close to par or sub par with U.S. bonds so are being liquidated as they mature, causing both to weaken against the greenback. Leven said though that the phenomenon was more likely a case of a self-fulfilling trend, with dealers anticipating a fall in the Australian dollar as soon as the euro depreciates, and therefore selling the Aussie. He predicted that the Aussie could hold at USD0.52-USD0.5225 for a couple of weeks but could then weaken below the USD0.52 support level.
