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As early as March the central bank had cut rates due to the strong NZD. And only last month it pointed out that the kiwi is still trading approx. 6% stronger on a trade-weighted basis than it had assumed in its projections. Based on these projections the RBNZ even expects NZD to depreciate by an impressive 8% by year end.
At the same time the market also increasingly priced in rate cuts on the part of the New Zealand central bank (Reserve Bank of New Zealand, RBNZ) though.
Only a significant recovery in export prices (and the terms of trade) would reduce the central bank’s sensitivity to the currency, support domestic incomes and help an eventual NZD recovery.
OTC updates and Options Strategy:
As a result of the above economic and monetary policy events, the kiwi dollar was lower against the Australian dollar, with AUDNZD edging up at 1.0672, given a key resistance is broken at 1.0707 levels, further upside can’t be ruled out on disappointment and it is likely to spike higher after the NZ central bank eases as forecasted.
Well, in order to arrest this upside risk, we recommend option strap strategy that favours underlying spot’s upside bais.
1W at the money volatilities of 50% delta calls and puts are at trading around 12.84% which is reasonable as the vols currently are working in the interest of option holders as you can see IVs and corresponding movements in vega.
You can trade the IV value by monitoring an IV chart for a specific underlying market for a certain time period and determine the IV range. The peaks suggest the option is expensive to buy and the troughs suggest the option is inexpensive.
So, we recommend building the FX portfolio exposed to this pair with longs positions in 2 lots of 2W ATM 0.51 delta calls and 1 lot of ATM -0.49 delta puts of the same expiries.
Since we anticipate upswings in near term as per the signals generated by technicals as well as from risk reversals, this AUDNZD option straps strategy should take care of both upswings and any abrupt downswings just in case RBNZ disappoints the forecasters, and the strategy is likely to derive handsome returns on the upside and certain yields regardless of swings on either side as shown in the diagram.
