Japan recorded a 823.47 JPY billion surplus in April of 2016, compared to a 58.34 JPY billion deficit a year earlier and beating market consensus of a 492.80 JPY billion surplus.

It is the largest surplus since March 2010 as exports dropped by 10.1% YoY while imports shrank at a faster 23.3%. 

New Zealand is scheduled to announce its trade balance for today, trade surplus increased to NZD 117 million in March of 2016 compared to a NZD 661 million surplus a year earlier and below market expectations of NZD 476 million surplus.

Technically, more downside traction is foreseen in the weeks to come as it does not manage to hold onto 73.401 levels on a closing basis then the next immediate support could only be seen at 73.037 levels and bears may even drag upto 72.806 levels again in medium run, both leading and lagging oscillators are indicative of weakness in this pair.

Currency Option Strategy: NZD/JPY Short Put Ladder

Rationale: Unlimited downside and limited upside profit potential and higher IVs favor option holders in long run and writers in short run.

1W ATM IVs are trending higher at 13.09% and likely inch higher at 15.53 for 1m tenor which means the market thinks the price has potential for large movement in either direction, but you can observe the %change in premiums as the put contracts drifts into in the money (there exists the crux of derivative contracts).

How to execute: Short 1W (1%) ITM put option and simultaneously add longs on 1M ATM -0.49 delta put option and one more 2M (1%) OTM -0.35 delta put option.

Maximum returns are limited to the extent of initial credit received if the NZDJPY rallies above the upper breakeven point (BEP) as vega and IVs are progressively spiking higher with healthy gamma numbers as well, but large unlimited profit can be achieved should the underlying exchange rate of NZDJPY  makes a vivid downswings below the lower BEP.

Since the short put ladder is an unrestricted return with partial risk bearing strategy that is deployed because in addition to the puzzling uptrend in short term and downtrend in long-term, we think that the NZDJPY would also perceive significant volatility in the near term.