Australian dollar option interest surges on bet RBA turns hawkish

Lananh Nguyen and Robert Fullem

Updated Jul 1, 2017 – 7.29am, first published at 3.39am

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Already a subscriber?

Speculators looking to profit from the hawkish shift among global central banks have a fresh target: the Australian dollar.

With the pound, euro and Canadian dollar all surging around 2 per cent this week after officials signalled a bias toward tightening monetary policy, hedge funds are piling into Aussie options on expectations the Reserve Bank of Australia will follow suit. Implied volatility contracts with a tenor of one week spiked to 8.8750 on Friday, the highest since May 5. Speculators added more than $US1.7 billion of options on the Australian currency at a strike price of 77 US cents over the past two days, DTCC data show.

Volatility is picking up around central bank meetings, with the RBA and Sweden's Riksbank being the first out of the gate next week following a global shift in rhetoric. Gauges of price swings from one week to one month in euro-krona have jumped to the highest levels since April as investors bet the Riksbank, which like the RBA meets July 4, will follow other major global monetary authorities who have indicated the era of easy money may be coming to an end.

Volatility is picking up around central bank meetings, with the RBA and Sweden's Riksbank being the first out of the gate next week. Craig Sillitoe

"We see an uptick in short dated volatility," said Jason Leinwand, founder of consultancy FirstLine FX and former head of currency trading at MetLife Inc. "Short term high-frequency traders and prop traders like it, and can finally make some money."

The Aussie rose as much as 0.6 per cent on Friday AEST against the US dollar, reaching the strongest in three months, while the krona jumped as much as 0.6 per cent versus the euro. The Aussie

While the RBA is expected to keep rates steady, the "constructive tone of late will likely see markets hopeful of a similarly more upbeat tone", Jennifer Hau, a foreign-exchange strategist at Credit Agricole SA in London, wrote in a note to clients Thursday.

Australia's central bank could increase interest rates eight times in the next two years, former board member John Edwards said Tuesday. Rates have been on hold at 1.5 per cent since last August.

The Riksbank is expected to hold its key interest rate at a record-low minus 0.50 per cent on Tuesday, while some predict that it will remove the odds for a rate cut from its rate path, according to an investor survey conducted by SEB AB.

Bloomberg