Impact Of US-Iran Agreement And Falling Oil Prices
We see the US-Iran agreement as a major de-risking event that should continue to lower market volatility. The resulting plunge in oil prices, with Brent crude futures dropping below $75 a barrel for the first time this year, removes a key source of recent inflation fears. This suggests we should consider strategies that benefit from falling volatility, as the VIX index has already dropped over 15% in the last 24 hours. With improved risk appetite supporting the Aussie dollar, we are positioning for a potential move towards the 0.7143 resistance level. We are looking at buying short-dated call options on the AUD/USD ahead of the RBA decision, which is expected to hold rates steady. A less hawkish tone from the RBA, prompted by lower energy prices, could be seen as positive for growth and the currency.Central Bank Divergence And Commodity Support
The main focus now shifts from geopolitics to the divergence between the RBA and the Federal Reserve. The current yield spread on 2-year government bonds sits around 25 basis points in Australia’s favor, a level that has historically supported the AUD. We will be watching to see if this spread widens after the new Fed Chair’s first press conference. However, the new Fed leadership is a major unknown, creating significant event risk later this week. To manage this, we are using some of the premium from our long positions to buy cheap, out-of-the-money put options. This provides a hedge against any surprisingly hawkish message from the Fed that could cause a sharp reversal in the US dollar. While the drop in oil is notable, the Aussie’s fundamental strength is supported by other key commodity exports. Australia’s terms of trade saw a 2.1% quarterly increase last quarter, driven by strong demand for iron ore and coal. This underlying strength provides a cushion for the currency, even with softer energy prices.Start trading now — click here to create your real VT Markets account.
