FxWirePro: NZD/USD projections move in sync with IV skews – Short leg in DCPS derives handsome yields, uphold long leg

We project Kiwis dollar to drop over the next year or so, as the growth will likely continue to underperform the RBNZ’s lofty forecasts (refer above chart), and as tight financial conditions restrain any requirement for OCR hikes, allowing rate compression vs USD.

While still expecting depreciation, we are raising our sights by a few percent on NZDUSD, as a benign global economic backdrop and persistent weakness in the USD are incentivizing carry and boosting the performance of commodity exporters. 

Thereby, we maintain the 4Q’17 target is 0.70 (previously 0.67), and our 2Q’18 target is 0.66 (previously 0.64).

The NZ data have underperformed significantly (refer above chart), and NZD rates have compressed to remove much chance of rate hikes within the next year.

But stability in policy rates appears to be enough to keep higher yielding FX out-performing, atleast until the FX rate becomes a genuine problem for the central bank.

Hedging framework:

OTC Outlook and Options Trade Recommendations:

All the factors stated above seem to be discounted in FX options market, please glance through nutshell evidencing IV skews that signify hedger’s bearish interests in next 3-months timeframe. Positively skewed IVs of this tenor signal underlying spot FX is expected to be either edgy with sideways swings or lowering southwards as the skews have been well balanced flashing positive numbers on both OTM and ITM strikes.

By now, writing 1m (1%) in the money put would have fetched us handsome yields snapping rallies upto 0.7558 levels in form of initial option premiums received. You could easily make out short legs on ITM puts of narrowed expiries are going worthless as anticipated. For now, we uphold longs in 3m at the money put, the structure could be constructed at the net credit.

Upon the mounting bearish risk sentiments are observed as you could see the positively skewed IVs in OTM put strikes of 1m tenors (refer positive IV skews indicate the strikes towards 0.70 which is our forecasts).

The combination of IV 1-3m skews suggested credit put spreads that has favoured to arrest ongoing upswings in short run and bearish risks are to be taken care by 3m ATM longs.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards -116 levels (which is highly bearish), while hourly USD spot index was flashing at -71 (bearish) at the time of articulating (at 08:03 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest