Bet on Make or Break Trade Moments Via the Aussie, BofAML Says
The MSCI AC World Index has fallen almost 4% this month and the Aussie is down 1% against the greenback.
(Bloomberg) -- Option trades on the Australian dollar may be the best way to bet on the next big turn in the U.S.-China trade saga as the September tariff deadline approaches, according to Bank of America Merrill Lynch.
The Aussie has the most upside in any trade deal and the greatest downside in a full-blown trade war, strategists led by David Woo wrote in a note Wednesday. They recommended investors buy one-month Australian dollar-U.S. dollar strangles, an option strategy used by those who expect a large movement in a security but are unsure in what direction.
“The Aussie has the scope for the largest moves around a ‘make or break’ moment leading up to Sept. 1, when U.S. tariffs on China are set to escalate,” the strategists wrote. “Buying strangles over the event looks attractive to us even after the recent pick up in volatility.”
Volatility in global financial markets has spiked since President Donald Trump said last week the U.S. would impose tariffs on a further $300 billion in Chinese imports as of Sept. 1, and China promised to retaliate. The MSCI AC World Index has fallen almost 4% this month and the Aussie is down 1% against the greenback.
One-month at-the-money option implied volatility in the Australian-U.S. dollar cross has risen nearly 2 percentage points, yet remains below its five-year average, according to data compiled by Bloomberg.
“FX has moved from the sideline to the center stage with escalating trade tension,” the strategist wrote. “We think Aussie volatility is the way to play.”
--With assistance from Stephen Spratt.
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To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Ravil Shirodkar
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