Options activity: Investors are seeking downside protection in AUD & CAD

The preliminary data from the CME group shows that the option traders are seeking downside protection in the Aussie, which signals a cautiously bullish outlook. 

Huge build up in near-the-money Puts

CME data show the open interest (OI) in 0.7750 Put options jumped by 176 contracts on Friday. The OI in the 0.7650 Put rose by 335 contracts, while 307 contracts were added in the 0.7550 Put option. The OI in the ITM calls fell by 245 contracts, while the OI in ATM calls rose by 361 contracts. 

The fact that OI jumped in 0.7750 Put and 0.7650 Put on Friday suggests hedging activity against long spot positions. 

Yield differential is stagnant

The spread/difference between the Aussie 10-year bond yield and US 10-year Treasury yield narrowed last week from 44 basis points (bps) to 0.38 basis points. 

Aussie stuck at key hurdle, overbought 

On technical charts, the currency pair looks overbought as per the 14-day RSI. Interestingly, the overbought conditions are also making it difficult for the AUD/USD to take out 0.7831 (23.6% Fib R of 1.1080-0.6827). 

Thus, investors buying downside insurance as suggested by the options activity seems logical. 

CAD/USD: Investors buy OTM puts

The CME data shows a total addition of 412 contracts in the CAD/USD Put options OI as opposed to a net reduction of 55 in the call options OI. The details reveal fresh build up in OTM Puts - 0.7850, 0.7800. ITM calls saw a drop in the OI by 115 contracts. 

The options activity suggests the investors are seeking downside protection in the Canadian dollar after having priced-in the hawkish BoC. 

The USD/CAD pair is oversold as per the 14-day RSI. The weekly RSI is almost oversold as well. Hence, a correction in the CAD cannot be ruled out. 

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