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Short

GBP/AUD gap down opening with gr. doji signals stern weakness

FX:GBPAUD   British Pound/Australian Dollar
215 0 3
The pair has broken a support initially at 2.0152 and now at 2.0054 with a sharp gravestone doji at 1.9915 levels and it is a gap down opening (prev close - 2.0152; today's open - 1.9922) which is on the verge of testing next medium term support at 1.9747 and at 1.9313 levels which 38.2% retracements during Q2 as sterling worsening and losing its strength against Aussie dollar.

We could foresee more downward potential when this severe bearish indication is coupled with southward direction journey that we've been observing consistently and the candle patterns signaling weakness popping up quite often like gravestone stone, hanging man and shooting star at peaks of 2.1553, 2.1607, 2.0101 and 2.0033 levels respectively on monthly charts as well (see within red colored circled areas at peaks).

In conjunction with these bearish patterns, for more substantiation both leading and lagging indicators are clear sell. Robust volume build up is an additional conformity to this bear trend.

On dailies, 21DMA has just crossed over 7DMA, while MACD on both daily and monthly signal bear trend continuation.

Hence, we could continue to foresee more weakness and negligible price bounces in between in near term as both intraday and the daily chart suggest bear flags that would upshot targets at 1.9775, if it fails to hold this level 1.9745 is also quite possible in short run with some price recoveries but we maintain our long term southward targets at 1.9747 and 1.9313.

Hedging Framework:

IVs for GBPAUD             ATM option contracts are flashing at 12.27% for 1 week expiries. We would like you to know that options with a higher IV cost more. This is intuitive due to the higher likelihood of the market 'swinging' in your favour. If IV increases and you are holding an option, this is good. So, risk averse traders can go for hedging with the below strategy,

Spread ratio: (Long 1: Long 1: Short 1)

Construction:

Long 1M at the money +0.51 delta call option, Long 1M at the money strike -0.49 delta put option

Short 2W (1.5%) out of the money call option with preferably positive theta.

Since ATM implied volatility is flashing more than 12% which is on higher side, since the straddle component consists of buying an ATM put and buying an ATM call of the FX pair with same expiration, probabilities of expiring in the money are very high.

The contrasting (versus) component is to sell an OTM call of the same FX pair but with a shorter expiration which would reduce the cost of hedging, this is because of the trend moving southwards and even if it evidences abrupt swings adversely chances of expiring in the money is quite low as the downtrend is on and we've chosen out of the money instrument with shorter expiry.
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