Markets were range bound ahead of the run of imminent central bank meetings, starting with the FOMC tomorrow morning.

The US data releases underscored the improved tone to the economy recently.

Financial markets treaded water ahead of tomorrow’s FOMC meeting. On balance, the USD regained its poise following a weaker overnight session as encouraging economic releases underscored expectations that the FOMC will be more upbeat on its assessment of economic activity.

While commodities traded sideways too, but oil slipped further, with WTI back to US$42.8/bbl – a 10.5% fall in the last month. Metals in Q2’16, price forecast came within 5% of the realized prices for copper, aluminium, nickel, we were off by almost 16% in our zinc forecast.

We still expect NZD/USD to weaken as NZ/US monetary policy diverges. A recovery in export prices (and the terms of trade) would reduce the central bank’s sensitivity to the currency, support domestic incomes and help an eventual NZD recovery. 

The implied volatilities of 1W NZD/USD ATM options are flashing at 13.52%, this high yield vols seems conducive for option holders by the virtue of premiums spiking exponentially if the underlying responds to our anticipation.

Hedging Framework:
Spread ratio: (Long 1: Long 1: Short 1)

With trend puzzling on either direction we like to advocate 3-Way Options straddle versus call option.

How to execute:  

Go long in NZDUSD 3M At the money delta put, Go long 2M at the money delta call and simultaneously, Short 1M (1.5%) out of the money call with positive theta.