FxWirePro: Bullish/Bearish Scenarios of Kiwis, NZD/USD OTC Indications and Hedging Perspective on Status-quo RBNZ

Bearish scenarios of NZDUSD below 0.62 if:

1) The NZ housing market slowdown resumes due to credit tightening by banks; 

2) Kiwis immigration rolls over more quickly; 

3) Weak business confidence sees firms cut hiring.

Bullish scenarios of NZDUSD above 0.70 if:

1) NZ fiscal easing is accelerated; 

2) NZ inflation expectations begin to ratchet up quickly due to the government’s minimum wage increases. 

OTC Indications and Options Strategists:

Whereas Kiwis dollar’s (NZD) weakness has been prolonged in sympathy with high-beta FX. This led us to slightly lower our NZD
forecasts last month to reflect the risk of ongoing negative news-flow relating to EM. 

Fed hikes further through 2019 then the USD appreciation is most likely, consequently, NZDUSD will drop.

6m IV skews have clearly been indicating bearish risks. Hence, major downtrend continuation shouldn’t be panicked the broad-based bearish outlook amid minor rallies. 

These positively skewed IVs of 6m tenors signify the hedgers’ interests to bid OTM put strikes up to 0.64 levels (refer above nutshells evidencing IV skews).

We reckon that the global risks play less favorably for NZ than they do for Australia, and the central bank has reason to be credibly dovish even as the data have outperformed some of the downside risk scenarios laid out earlier in 2018. NZD is also expected to depreciate to 0.65 by end of H1’2019.

While the NZDUSD trade is underwater following positive news reports on a US-China agreement. The erratic nature of news flow is one reason why we had suggested NZDUSD shorts via options in the past. 6m NZDUSD (1%) in the money put options have been advocated, in the money put option with a very strong delta will move in tandem with the underlying.

The trade projection is now out of the money but we maintain exposure given tail risks to high beta FX as noted earlier. Courtesy: Sentrix & JPM

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 31 levels (which is mildly bullish), while hourly USD spot index was at -67 (bearish) while articulating (at 06:06 GMT).

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