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Having been a choice expression for the dollar’s dominance over high-beta FX in 2018, the outlook for NZD is now more nuanced as other previously more hawkish central banks have abandoned hiking biases.
We raise our 2019 NZDUSD forecasts by 2-4c while preserving a downward slope. By end of 3Q’19, our forecast is towards 0.63 levels. Please be noted that FX options hedging activity of this pair is also in sync with the above projections. 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 0.63 levels (refer above nutshells evidencing IV skews).
Dovish shifts in policy guidance from the Fed and RBA, which we did not anticipate, have removed the RBNZ’s status as the most dovish central bank in G10. The pullback in the US real rate outlook has also buoyed commodities generally, as captured in the J.P Morgan commodity curve index (refer above chart).
Even as the NZ data rebounded over the latter part of 2018, Governor Orr declared that the OCR will need to be on hold until 2020 in order to sustainably hit the inflation target.
Hence, for those who foresee the long-term exposures, ahead of RBNZ monetary policy that is scheduled for this week, contemplating above factors, we advocate initiating shorts in NZDUSD futures contracts of June’19 delivery as further downside risks are foreseen and simultaneously, longs in futures of Mar’19 delivery. Thereby, one can directionally position in their FX exposures. The directional implementation of the same trading theme by further allow for a correlation-induced discount in the options trading also if you choose strikes appropriately.
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 129 levels (which is neutral), while hourly NZD spot index was at 47 (bullish) while articulating (at 09:58 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
