FxWirePro: NZD/USD bearish/bullish driving forces, IV skews in sync with the projections – ITM puts to hedge

Bearish NZDUSD scenarios below 0.60 if: 

1) The NZ housing market slowdown becomes disorderly; 

2)  The NZ immigration rolls over more quickly; 

3) Weaker business confidence sees firms dramatically cut hiring.

Bullish NZDUSD above 0.70 if: 

1) NZ fiscal easing is accelerated; 

2) Kiwis inflation outlooks begin to ratchet up quickly due to the government’s minimum wage increases. 

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. 

6m IV skews have clearly been indicating bearish risks. Hence, 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 0.65 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 expected to depreciate to 0.65 by end of H1’2019.

The major downtrend of the underlying spot still remains intact (refer above technical chart). 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.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 92 levels (which is bullish), while hourly USD spot index was at -69 (bearish) while articulating (at 08:06 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex