FxWirePro: The Driving Forces and Options Strategies for AUDNZD’s Wedged Trend Ahead of RBNZ

A glance at underlying spot moves of AUDNZD: Outlook has been rangebound, as weaker housing and consumer data is offset by stronger iron ore prices and a cautiously optimistic RBA. 

The cross remains stuck in a tight 1.1423 – 1.0333 range. Recent economic news has not been delightful as the housing market continues to trend lower and household spending is subdued, but against that iron ore has surged and the RBA remains cautiously optimistic, and Iron ore prices have easily outpaced NZ commodity prices. Key events remaining this week are Wednesday’s speech from RBA Gov Lowe and Friday’s Statement of Monetary Policy. 

RBNZ on the flip side, is scheduled for its first monetary policy, which is most likely to maintain status quo in its OCR rates as the governor Orr had stated in the previous meetings that the OCR would need to be on hold until 2020 in order to sustainably hit the inflation target. Although the Kiwis dollar slightly gains upside traction.

Three months ahead: AUD underperformance over the past few months is mainly due to the cooler outlook for global growth, with China especially in focus, and partly due to Australia’s weak housing market. However, Australia’s commodity price basket has risen. NZD/AUD is 8% overvalued, according to interest rates and commodity prices, arguing for a reversion sometime over the next few months. We target 0.94 or lower, assuming global sentiment does not deteriorate.

AUDNZD Strangle Shorts: As you could observe the swings in the major trend have been oscillating between 1.1423 and 1.0333 levels since June 2015, it is wise to deploy (0.5%) out-of-the-money call and (0.5%) out-of-the-money put options of 1m tenor as shown in the diagram. The strategy can be executed at the net credit and certain yields would be derived in the form of initial premium received as long as the underlying spot FX remains between OTM strikes on the expiration.

3-Way Straddles Versus ITM Puts: 

Considering non-directional movements in the underlying spot FX (refer above chart), 3-way straddles are advocated, the strategy comprises of at the money +0.51 delta call, at the money -0.49 delta put options and short in the money put options of narrowed expiry with a view of arresting potential FX risks on either side but capitalizing on minor upswings in the near-term. Hence, on hedging grounds, buy 2m ATM delta puts and ATM delta call of similar tenor and short (1%) in the money put options of 1w are advocated.

Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 9 levels (which is neutral), while hourly NZD spot index was at -117 (bearish) while articulating (at 08:08 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex