The US Presidential election tonight has been center of attraction for the markets. The results should become clear by Wednesday. While the FOMC member Evans speaks on monetary policy; his stance on the latest payrolls data will be of interest.

Targets 0.6950 or lower as long as the RBNZ cuts to 1.75% in November and the Fed tightens to 0.625% in December, as we expect. (13 Oct).

The strategy:

We target 0.70, based on an assumption the Fed will hike in Dec and the RBNZ will cut in this week's meeting. However the persistent backdrop of global demand for high-yielding currencies is strong - if the Fed either doesn’t hike or signals very gradual tightening, then 0.75+ is likely instead.

Contemplating all these underlying factors, to arrest these downside risks we advocate initiating longs in 1m (1%) ITM put option with net delta -0.71.

A higher (absolute) Delta value is desirable for an option buyer, whilst a Delta close to zero is desirable for the option seller; a buyer wants their option to become more valuable whilst a seller wants the option to become less valuable.  

Rationale: Further dollar rally into December FOMC

The market is still underpricing the likelihood of a Fed hike by year-end. We expect further gradual dollar gains into the December FOMC meeting.

At the same time, the RBNZ is widely expected to cut rates for the final time in November, and that is already priced in.

Moreover, NZD/USD technicals are negative with the failure to regain the neckline of the head-and-shoulders pattern above 0.72. Short Kiwi would work particularly well if broader financial volatility were to rise from here.

Risk/return profile: No Fed cut and continued pro-carry macro environment, the key risks to the trade are that the RBNZ does not cut rates in November, the Fed does not hike by December, and the pro-carry global macro environment persists. The divergent policy expectations on the RBNZ and Fed are crucial for the trade to work.