FxWirePro: An eagle eye on Antipodeans – Reshuffle AUD/NZD hedging portfolio from options strips to straps

RBNZ's monetary policy is scheduled for this month (precisely on September 26th) which is most likely to be status quo. Just like the RBNZ Governor, the short end continues to “watch, worry and wait” as direction from here (with around 11bps of cuts priced in by mid-2019) hinges heavily on the upcoming flow of data. The picture is a little clouded by upcoming (backward-looking) Q2 GDP figures, and that may see the market drift a little higher as longs get a little impatient. 

Carry investors will also need to be mindful of funding markets. We doubt yields will push up too far, especially ahead of the RBNZ’s September OCR Review.

The NZD cannot buy a trick and is having little trouble in breaking through support levels. With global forces in the box seat we expect it to continue to trade on the back foot this week. US data continues to be doing just enough to support the greenback and trade tensions and emerging market troubles are weighing on risk appetites more generally. 

AUDNZD in near-terms, after days consolidating in the 1.0850-1.0900 area, early signs of lift-off towards 1.1000. Major event risk from AU jobs data today though.

However, in medium terms, if the US-China trade tensions subside, then AUDNZD should continue rising during the next few months, relative AU/NZ economic growth favouring the AUD. The 1.1250 area (where it peaked in 2017) is a possible target.

Option Strategy: Options Straps

Combination ratio: (2:1)

Contemplating all the aforementioned fundamental driving forces, we could foresee the underlying pair oscillating between 1.1423 and 1.0333 levels but with some upside traction. Thus, we wish to reshuffle the previously advocated the options strips strategy into option straps on the hedging grounds. The options straps strategy which contains 3 legs with a view to arresting price swings on either side but more concentrated for upside risks.

The execution: Go long in 2 lots of AUDNZD at the money 0.51 delta call options of 1M tenors, simultaneously, go long in 1 lot of at the money +0.51 delta put option of the similar expiry.

Description: Traders expect increased volatility without taking a view on any particular direction.

Effect of Volatility: Directly proportionate to the volatility, the value of both options premiums would likely to enhance as volatility increases (good) and will decrease as volatility falls (bad).

Please be noted that the strategy likely to fetch positive cashflows regardless of the swings with more potential on upside. Hence, one can deploy this options strategy on hedging as well as speculative grounds. Courtesy: ANZ

Currency Strength Index:FxWirePro's hourly AUD spot index is flashing at 57 levels (which is bullish), while hourly NZD spot index was at shy above 96 (bullish) while articulating (at 09:39 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex