FxWirePro: Long term hedging perspectives - confront NZD/USD’s steep declines with Calendar Spreads

NZD's gains have been unsustainable despite a quite expected and inevitably imposed recent OCR rate cut by RBNZ by 25 bps which is in line with forecasts. However, we think since this was below expectations of NZ's exporters as the Kiwis exports were struggling, this has added fuels to bearish momentum on NZD/USD fluctuation.

Technical Round-up:

Kiwi dollar's losing streak has been stronger from last 1 year to hit almost 6 year's lows. On weekly charts, from last April the pair has been tumbling non-stop to evidence the huge loses. Shooting star like candle is occurred on daily charts and the trend on this chart has still been weaker as the RSI (14) is converging downwards with massive price dips. While %D line is attempting for crossover on slow stochastic at 34 levels. Overall, the major trend has been downtrend dominated by the bears with clear volume confirmation. The near term crucial support is seen at 0.6441 levels if further dips are seen from current levels on closing basis. Keen observation on closing prices is eventually critical at this stage.

Long term Hedging call:

When all eyes tend to drag this currency towards further slumps, on a long term perspective, contemplating the above critical support we build neutral calendar spread on this pair. Here, idea is not to go against the trend but on hedging grounds, strategy goes this way:

Add 2M At-The-Money 0.5 delta Calls of NZD/USD with slightly negative theta + Add simultaneously shorts 15D At-The-Money -0.3 delta Calls of NZD/USD with positive theta.

On all almanac positions, it is highly essential to fix on which summarize action to take when the near-term options expire. This choice depends heavily on the revised outlook of the underlying exchange rate movements at expiry.