FxWirePro: Calendar Spreads to offer attractive carry on central banks actions

All eyes are curiously focused on the two-day FOMC monetary policy meeting which concludes later today with investors assigning 70% probability for a further 25bps hike in the target rate to a range of 2.25%-2.50%. However, rising signs of slowing growth in a number of the world’s big economies and US equity markets’ recent hefty losses support the view that the Fed is likely to take a pause in its rate tightening cycle earlier than previously thought.

Bank of Japan (Thursday): With inflation, likely under renewed downward pressure and core inflation well below target, there is no rush to signal much of anything at this meeting — let alone alter policy variables. The policy rate should remain at -0.1%, the 10-year yield target should remain ‘around 0%’ and asset purchase parameters should remain unchanged. Related to the decision is that Japanese CPI inflation for November (Thursday) is likely to track energy prices lower, much like elsewhere. Headline inflation is expected to drop back below 1% y/y with core inflation excluding fresh food holding steady around 1% and only at about half of the BoJ’s goal.

We are re-scaling a NZD short, adding a spot position to augment a digital put that is only very low delta now. NZD has been flattered by the abrupt re-pricing of RBNZ policy a month ago but positions should be cleaner now and NZD hence more vulnerable to a further attrition in global macro confidence.

Increase defensive anti-cyclical exposure through NZDUSD, hold bearish AUDJPY exposure
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We activated a cautiously defensive position in AUDJPY through a calendar spread of one- touches (short 3M, long 6M) with premium rebate if the strike is hit within 3M. The yen is quite a sluggish recession hedge historically, appreciating only once a US recession gets underway. 

Nevertheless, we view JPY as a viable hedge to late-cycle stress as it’s never been this cheap at the tail-end of an expansion (REER is 21% below its 20Y average). The calendar spread provides attractive stand-still carry if the market remains USD- centric through coming months and the yen continues to struggle with the pull from higher US rates (the structure rolls up to 58.4% in 3-months’ time). The trade has accumulated a few percentage points of value through the interim period of noisy but ultimately directionless activity in the cross and remains in our view an attractive way of mitigating the typically onerous cost of holding anti-cyclical FX exposure.

We have owned downside optionality in NZDUSD over the past two months. The AED may have a month till expiry but the strike remains unfeasibly far off following the previous nasty squeeze on dovish RBNZ rate views and consensus short NZD positions. But with the European PMI adding to concerns about the deterioration in global growth, we believe high-beta currencies such as NZD are susceptible to another downdraft and we’re therefore supplementing the beta with a spot position.

Sell NZDUSD at 0.6783, stop at 0.6919. 

Short NZDUSD through a AED digital put (strike of 0.6195, expiry 24thJanuary, 2019). Paid 15% 26th October, marked at 0.65%.

Bearish AUDJPY OT calendar spread: Sell 3m 78.50 strike OTs in AUD 1mio payout vs. Buy 6M 78.50 strike OTs in AUD 1.4085 mio payout. Paid 40.85% on November 21st. Marked at 44.46%. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 91 levels (which is bullish), while hourly USD spot index was at -50 (bearish) while articulating (at 12:57 GMT). 

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