FxWirePro: Bid 3m/6m NZD/USD IV skews and hedge via put ratio back spreads on bearish scenarios and potential risk events

Bearish NZDUSD scenarios below 0.67 if:

1) The housing market slowdown becomes disorderly;

2) The immigration rolls over quickly;

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

Accordingly, to these driving forces, the underlying NZDUSD spot FX has been sliding down, bearish swings now on the verge of 4-month lows. Both leading momentum and trend indicators signal more downswings on the cards (refer technical chart).

Potential trigger events:

GDT auctions – 5th Jun

Net immigration (Mar): 21 May

Retail sales volumes (1Q): 21 May

RBNZ FSR: 30 May

ANZ business survey (May): 31 May

Terms of trade (1Q): 1 Jun

Bids on 3m skews have come in quite worthy, as they signaled the hedging interests bearish risks. Thus, we expect NZDUSD to depreciate to USD 0.6650 by end of 3Q’19. Accordingly, we’ve recommended diagonal put ratio back spreads in order to participate both momentary upswings in the consolidation phase and anticipated downside risks.

Writing 1m (1%) in the money put with positive theta snaps decisive rallies, you could easily make out short legs on ITM puts would go worthless considering time decay advantage. Simultaneously, we uphold 2 lots of longs in 3m 1% OTM puts, the structure could be constructed either at net debit.

It was explicitly stated that “Theta shorts are recommended in this strategy because, Theta is not a constant, it changes as the underlying market moves and time passes. Theta is the sensitivity of an option’s value to the passage of time. It is usually expressed as the change in value per one day’s passage of time.”

Well, for now, the medium term perspectives of this pair seems to be bearish as the US dollar remains in a two-month-old sideways range, which means further sideways ranging in NZDUSD is possible during the month ahead.

Further out, though, we are bearish. The NZ-US interest rate advantage is rapidly shrinking and should eventually weigh, pushing NZDUSD towards 0.68 by mid-year.

Moreover, the 6m skews are targeting towards OTM put strikes at 0.64 (refer above nutshell) which is in line with the above-mentioned projections.

Hence, on hedging grounds, the option the holder of OTM puts still desirable and is deemed to be on upper hand.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 152 levels (bullish), while hourly USD spot index was at shy above -12 (bearish) while articulating at 09:26 GMT. For more details on the index, please refer below weblink:

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

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