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FxWirePro: NZD/USD to factor in RBNZ - Hedge FX uncertainty via 3 way straddles versus put ahead of Fed likely to defer policy stance

The RBNZ still hints that another rate cut is more likely than not in the coming months after the central bank decides to maintain ‘Status Quo’ in their OCR rates at 2.25%.

But with economic conditions improving recently, the RBNZ shared our assessment that it was worth waiting a bit longer to make that call.

We continue to look forward one more OCR cut this year, at the August Monetary Policy Statement.

On a flip side, Fed’s announcement is scheduled for next week which is likely to remain unchanged as well. This was clearly hinted by recent Yellen’s speech that was quite dovish concerning job market uncertainties and global market turmoil.

So, in light of the signals from the Fed and the recent economic data, we now expect the Fed to raise rates in September, followed by another move in December.

Since we could foresee risk bias on both sides, as the long term downtrend has given trend reversal signal or it is just puzzling.

Well, technically although this pair has tested supports minor supports at 0.6679 levels and showing considerable price bounces, bearish pressures at 0.7150 can't be disregarded for short term trend.

On the contrary, a potential breach of 0.7150 would determine short-term rallies also.

Hedging Framework:

The current implied volatility of NZD/USD ATM call options is at 9.66%, lower side IVs are always favourable to the option writers, for long term tenors (1-3m) spiking at 12.5% which is conducive for long term option holders.

Spread ratio: (Long 1: Long 1: Short 1)

With trend puzzling on either direction we like to advocate 3-Way Options straddle versus call option.

How to execute:  

Go long in NZD/USD 2M At the money delta put, Go long 4M at the money delta call and simultaneously, Short 1M (1.5%) out of the money put with positive theta.

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