FxWirePro: Bearish/bullish scenarios, OTC sentiments and hedging strategies of NZD/JPY

NZDJPY has constantly been tumbling ever since it peaked 77.878 levels. NZDJPY’s recent peak is the latest in a series of lower peaks during the past year. The recent decline has potential to push below 74 levels.

Bearish NZDJPY scenarios:

1) The NZ housing market slowdown becomes disorderly

2) The NZ immigration rolls over quickly

3) NZ bank funding issues intensify, causing the market to question NZ's ability to attract capital inflow.

Bullish NZDJPY scenarios:

1) Fiscal easing is delivered quickly

2) New RBNZ Governor Orr starts with a surprisingly hawkish bent.

Our RBNZ outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 2yr swap rates in a 2.10% to 2.50% range, as long as inflation remains below 2%. In addition, the NZ-US interest rate advantage has been eroded, removing one of the previous attractions of the NZD. Further, domestic data is indicating the NZ economy is slowing. 

OTC outlook: Please be noted that the 2m options skews indicate the hedging sentiments for the bearish risks. Bids are for OTM puts upto 73 levels. As shown in the diagram, the execution goes this way: Initiate 2 lots of 1m longs in Vega put options, simultaneously, add 1 lot of Vega call options of the similar expiry, the strategy is executed at net debit.

Options Strategy: Contemplating both bearish and bullish trends of this underlying pair, to participate in the puzzling swings, we advocate option strips strategy that contains 3 legs of vega longs (2 puts plus 1 call) of 1m expiries. The option strips that likely to fetch desired yields regardless of the trend but more potential on southwards by arresting bearish risks.

One can deploy this strategy both on trading as well as hedging grounds. Please be noted that the strategy is likely to derive positive cashflows regardless of the underlying spot FX moves with more potential on the downside.

Currency Strength Index: FxWirePro's hourly NZD spot index is flashing at 84 levels (which is bullish), while hourly JPY spot index was at shy above -161(bearish) while articulating (at 12:03 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex