FxWirePro: What is pushing NZD lower in H1 2016 – NZD hedging ideas

We see a return to the bad old days of large current account deficits, which will be a headwind to NZD even if the RBNZ have reached the trough for the monetary policy cycle.

Preservation of solid domestic demand growth amid housing exuberance and trade drags should see the current account deficit position widen materially, to near 7% of GDP.

The NZD to reach out at USD 0.59 by H1 2016 and USD 0.62 by end of H2 2016.

There are two key drivers for moderately less positive view on NZD:

Primarily, you cannot deny the fact that the easing cycle by the RBNZ persists through Q1 2016; we look ahead for a further 50 bps of easing from the RBNZ (in contrast, the market has just 25bp of easing priced). This, against a backdrop of rising US short rates, should see short real rates compress further and keep the pressure on NZD.

Second, the estimates for the current account deficit to display a factual drop in 2016, which, against a backdrop of rising US yields, should argue for more risk premium to be priced into the New Zealand dollar. In the spirit of assessing what is new for the NZD in 2016 relative to 2016, we think the current account dynamic deserves attention.

NZDUSD: Anticipating the above vital fundamentals we build calendar combinations on this pair that hedge the potential downside risks and strategy also offers speculative benefits as we have shorts on one side when you have higher IVs of 16.62%.

Since Kiwi dollar's long lasting bears back in action, the recommendation is to buy 1M 2W at the money -0.5 delta puts of NZDUSD and simultaneously short 1W (0.5%) in the money call with positive theta value and delta close to zero.

NZDJPY: Since the short put ladder is an unrestricted return with partial risk bearing strategy that is deployed because in addition to the puzzling uptrend in short term and downtrend in long-term, we think that the NZDJPY would also perceive significant volatility in the near term.

With current spot FX at 75.812 levels, the strategy takes care of long term basis hedging motives and build shorts on 1W 1.5% ITM put option (shorter expiry that should match to the upswings in near term) and we are awaiting the more functionality of longs on 15D ATM -0.50 delta put option and one more long position on 1M (-1.5%) OTM -0.39 delta put options.