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The annual Budget is delivered today, and analysts will be interested in how the spending plans are reconciled with the plan to reduce debt over the next few years. NZ interest rate markets will be interested in any revisions to the forecast for NZGB issuance.
Our RBNZ outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 2yr swap rates in a 2.10% to 2.50% range, as long as inflation remains below 2%. Longer maturity rates will largely follow US rates.
Bearish NZDUSD scenarios (below 0.67) if:
1) The housing market slowdown becomes disorderly;
2) The immigration rolls over quickly;
3) NZ bank funding issues intensify, causing the market to question NZ's ability to attract capital inflow.
Bullish NZDUSD scenarios: (above 0.73) if:
1) Fiscal easing is delivered quickly;
2) Inflation expectations begin to ratchet up quickly ahead of the government’s minimum wage increases.
Hedging framework:
With respect to strikes selection, the outperformance of OTM NZD call strikes relative to NZD puts is systematic (refer above chart) making us favor OTM NZD calls over straddles.
We recommend buying delta hedged 3M 25D NZDUSD calls @8.05/8.375 and delta-hedged 3M USDZAR straddles @13.2/13.6vols, indic.
Currency Strength Index: FxWirePro's hourly USD spot index is displaying shy above 149 levels (which is bullish), and NZD at -68 (bearish) while articulating (at 14:00 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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