Leveraged accounts remained bullish on commodity currencies, led by the AUD. They raised their net AUD longs by USD0.8bn to USD3.4bn, the highest since Sep 14 (see Figure 10). They also added to their net longs in NZD, by USD0.1bn to USD0.6bn.

The NZD is likely to trade cautiously ahead of a big week for central banks, with the RBNZ’s announcement on Thursday sandwiched between the Fed’s and the BoJ’s.

The RBNZ decides OCR on Thursday, which would be the main local risk for NZD markets this week. We expect an on-hold decision (at 2.25%) but also a clear signal it will cut in June (it’s a full MPS which provides the opportunity to clearly communicate the rationale as well as the outlook). That much is priced in and would elicit little reaction from the markets.

However we see a 30% chance the RBNZ decides not to wait for the next MPS and cuts next week instead. As long as the guidance allows for further easing, the NZD should fall sharply in response.

But if the message is that the easing cycle has probably ended, the NZD could perversely rise.

Glancing over NZD/USD OTC FX:

ATM IVs of 1W expiries are at 16.98% and 14.08% for 1M tenors, so the volatilities implied in FX option market of this pair is likely to perceive higher volatility times which is good news for option holders.

Because, the credit for this higher volatility goes to monetary policy season as explained above, and would mean that the option price has moved or is expected to move over a larger range in a set time period.

Subsequently, have glance on sensitivity table as well for the different rate scenarios and their probabilistic outcomes. We've just referred 0.25% OTM put strikes and their vols, it still shows 0.47 as delta values for underlying outrights with 52% of probabilities, that means 52% chances of finishing in-the-money.

Hence, 0.25% OTM put options are the best suitable for those we seek hedging instruments for further downside risks.