FxWirePro: NZD/JPY projections, OTC outlook and Options Strategy

NZDJPY could nudge a bit higher this week if global risk sentiment remains upbeat. There’s a decent batch of data from Japan with Jan trade data Wednesday, the flash PMI Thursday and national CPI Friday. 

The Medium-Term Perspective: The pair jumped sharply last week following the RBNZ MPS, where markets expected a larger dovish shift than was delivered. There’s potential nudge slightly higher to 76.500 levels, but we maintain bearish stances, targeting 73 in Q2 2019, as BoJ de facto tapering continues as we expect markets to soon start pricing in a disappointing Q4 GDP result and further dovish shift from the RBNZ. 

This week’s key NZ events are the GDT dairy auction on Tue, which should see another rise in prices, and the Tax Working group recommendations on Thursday. 

OTC Updates and Options Strategy: 

To substantiate above bearish stance, the 3m positively skewed implied volatility indicates the hedging sentiments for the lingering bearish risks. Bids are for OTM puts up to 73.000 levels. 

As a result, we construct suitable options strategy favoring slightly on the bearish side. Initiate longs in -0.49 delta put options of 3m tenors, simultaneously, short (1%) out of the money put options of the narrowed expiry (preferably 2w tenors), the strategy is executed at net debit.

Well, a higher (absolute) Delta value is desirable on the long leg in the above-stated strategy. Whereas, the Theta is positive on the short leg; as the time decay is good for an option writer (that’s why we’ve chosen narrowed expiry). The short side likely to reduce the cost of hedging with time decay advantage on the short leg, while delta longs likely to arrest potential bearish risks.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards -107 levels (which is bearish), while hourly JPY spot index was at -151 (highly bearish) while articulating (at 11:30 GMT).

For more details on the index, please refer below weblink:

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