FxWirePro: AUD/NZD Bullish/Bearish Scenarios and Options Strategies

Bullish AUDUSD scenarios:

1) China eases policy more forcefully and commodities rally on the back of future infrastructure spend; 

2) The Australian government commits to large fiscal easing, shoring up growth prospects and reducing the need for a further 50bp of easing from the RBA; 

3) The NZ housing market slowdown becomes deeper due to 

credit tightening by banks; 

4) The NZ immigration rolls over more quickly; 

5) Global risk assets start to respond more sharply to global trade and growth concerns.

Bearish AUDNZD scenarios: 

1) The RBA cuts rates more quickly than we expect; 

2) The Fed doesn’t deliver on market pricing for rate cuts in 2019; 

3) The trade conflict between the US and China broadens; 

4) The global economy slows more than expected, risking recession into year-end. 

5) NZ fiscal easing is accelerated; 

6) NZ housing begins to lift thanks to lower mortgage rates and a winding back of LVR restrictions.

During the next week, we target 1.0737. AUD-supportive factors near term include falling NZ-AU yield spreads (RBNZ more dovish than RBA), while speculators extremely short the AUD; and mining companies buying AUD for dividend payments. 

AUDNZD has been oscillating between 1.1425 and 1.0025 levels from last 5 years. The upswings, from the last couple of days, are targeting 1.0685 levels with potential for even higher. The main driving forces at this juncture, is the reversal of NZ-AU yield spreads following the RBNZ’s shift to an easing bias (while the RBA remains neutral). AU economic data has been strong too (retail sales, trade). There’s little major economic news out this week, apart from consumer confidence. 

AUDNZD Strangle Shorts: Contemplating the major trend that has been range-bounded (oscillating between 1.1425 and 1.0025 levels), it is wise to deploy (0.5%) out-of-the-money call and (0.5%) out-of-the-money put options of 1m tenor. The strategy can be executed at the net credit and certain yields would be derived in the form of the initial premium received as long as the underlying spot FX remains between OTM strikes on the expiration. 

3-Way Straddles Versus ITM Puts: Keeping non-directional movements in the underlying spot FX into the consideration (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-terms. 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.

Short hedge: Alternatively,at spot reference: 1.0675 levels, contemplating above fundamental factors, on hedging grounds ahead of RBA’s monetary policy that is scheduled for this week, long-term investors are advised to initiate longs in AUDUSD futures contracts of September’19 delivery as further upside risks are foreseen and simultaneously, shorts in futures of November’19 delivery for the major downtrend. Thereby, one can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately. Courtesy: JPM