AUD bulls and FX options alert for key Australian Q2 CPI
July 30 (Reuters) -Wednesday's Australian Q2 CPI data could boost the Australian dollar, even if it fails to beat expectations, but higher premiums for overnight-expiry AUD-related FX options aren't taking that for granted.
Expectations for an Australian rate hike next week will increase from the current 25% probability being priced by futures markets if CPI beats expectations, and that would lift the AUD. However, even if the numbers are only in line with expectations, they would still prevent the RBA from cutting rates any time soon, which is also an AUD positive.
Overnight FX options expire after the CPI data, and AUD-related implied volatility is higher to warn of increased realised volatility risk. Overnight-expiry AUD/USD implied volatility is up to 13.5 from 10.5 since including the CPI - a premium/break-even for a simple vanilla straddle of 38 USD pips, from 28 USD pips in either direction. Overnight AUD/NZD implied volatility rose to 11.0 from 6.5, or 51 NZD pips from 30 NZD pips in either direction.
AUD/NZD could see increased volatility if it breaks the July 17 year-to-date high at 1.1156.
However, directional volatility as measured by option risk reversals holds a premium for AUD puts versus calls, meaning realised volatility is deemed more likely to increase if AUD falls, which could happen in the unlikely event of the CPI data being below expectations.
AUD/JPY overnight-expiry options include the Bank of Japan policy announcement, too, so no surprise to see its implied volatility at 2024 highs.
For more click on FXBUZ
Overnight expiry implied volatility in AUDUSD and AUD/NZD https://tmsnrt.rs/3WstQiL
Australian CPI data https://tmsnrt.rs/3A0xnxn
(Richard Pace is a Reuters market analyst. The views expressed are his own)
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