FxWirePro: Double whammy on Kiwis rallies, but bears on the table - NZD’s ITM puts conducive as IV skews in sync with Q3 projections

Double whammy to the upside today: The dovish shift by the Fed, and solid NZ GDP data. The USD will suffer near term, but longer term US growth should outperform. 

NZDUSD’s rebound in March is mainly a function of US dollar weakness, as markets have backed away from the higher US interest rate view. 

However, the medium-term perspective still appears to be vulnerable. The long-held bearish outlook is still imminent, targeting below 0.66 levels by Q3’2019. 

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.

Ahead of RBNZ’s monetary policy meeting (scheduled on this Wednesday), 6m IV skews have clearly been indicating bearish risks. Hence, the 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 & Westpac

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 64 levels (which is bullish), while hourly USD spot index was at 4 (absolutely neutral) while articulating (at 08:04 GMT).

For more details on the index, please refer below weblink:

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