FxWirePro: AUD/NZD options strips best choice of hedging on RBA and RBNZ monetary policy divergence with Fed

AUDNZD’s downward correction could extend upto 1.05 before resuming the uptrend. The AUD has been hurt by Trump’s trade war against China, more so than the NZD. The Australian data calendar remains very quiet until early July.

1-3 months ahead: We expect a decline towards 0.90 over the medium term, as Australia’s economic momentum outperforms NZ’s.

While we expect RBA and Fed’s monetary policy divergence and minimal support from commodity prices to push the currency lower over time. We are also expecting the pace of domestic growth momentum to decline in 2H18, after a boost from net exports in the first half of the year. RBA commentary this year continues to reinforce Australia’s policy divergence with the G10.

On the flip side, over 2018, we see scope for some further underperformance from NZD, as we expect ongoing confirmation that the RBNZ can credibly lag policy normalization in the G3. The RBNZ meeting will be the local highlight this week - a minor review with only a press release and no press conference, in which the on-hold message should be repeated. That said, there is potential for a slightly hawkish surprise given the main development since the May MPS .is the Budget’s fiscal stimulus.

While the most consistent upgrading of growth has come on the US side, but this has not changed the Fed call for steady quarterly hikes (which are healthily priced).

Option Strategy: Options Strips

Combination ratio: (2:1)

Rationale: The Bearish technical environment in the recent past is more imminent (refer above chart), for more insights on this, please follow below weblink:

https://www.econotimes.com/FxWirePro-AUD-NZD-back-to-back-shooting-star-likely-to-form-head-and-shoulder-pattern--Trade-boundary-strikes-and-short-hedge-1388421

Contemplating all aspects of fundamental driving forces, technical and OTC outlook, the options strips strategy is advocated on hedging grounds. The options strips strategy which contains 3 legs with a view to arresting price downside risks.

The execution: 

Go long in 2 lots of AUDNZD at the money -0.49 delta put options of 1M tenors, go long 1M at the money +0.51 delta call option simultaneously.

Description: Traders expect increased volatility without taking a view on any particular direction. A strategy usually utilized over significant economic data events and other political events.

Effect of Volatility: Directly proportionate to the volatility, the value of both options premiums would likely to enhance as volatility increases (good) and will decrease as volatility falls (bad).

Please be noted that the strategy likely to fetch positive cash flows regardless of the swings with more potential on the downside. Hence, one can deploy this options strategy on hedging as well as speculative grounds.

Currency Strength Index: FxWirePro's hourly AUD spot index is flashing at -25 levels (which is bearish), while hourly NZD spot index was at shy above -166 (bearish) while articulating (at 07:45 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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