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The consumer prices rose by 0.2% in the September quarter, in line with our expectations but ahead of the median market forecast for a flat outturn.
The Reserve Bank had forecast a 0.1% increase in its August Monetary Policy Statement.
The annual inflation rate slowed from 0.4% to 0.2%, just above the record low of 0.1% that it briefly touched in December last year.
Today’s release doesn’t fundamentally change the picture for the RBNZ.
FX Outlook and option strategy:
The slight downward grind this year has morphed into a more sideways grind centered on 74.
It’s approaching a breakout, with perceived BoJ direction likely to dictate whether the break is upwards or downwards. It’s low key calendar this week, except the dairy price index.
Most importantly, the market pricing for a November OCR cut has rebounded over the past week, from 66% to 84%, in good part due to RBNZ McDermott’s reminder the OCR will be cut further.
There’s final Aug IP on Mon, and department store sales as well as final machinery orders on Tue.
None of this should shift views on the yen though the next BoJ quarterly update is only 2 ½ weeks away, so press stories on what the BoJ might and might not do should start to proliferate.
On the medium term perspectives, a reluctance to cut BoJ leaves the cross vulnerable to a fall below 72.0.
The execution of option strategy: Diagonal Put Ratio Spread (DPRS)
Go long in 1m ITM -0.71 delta put options, while simultaneously short 2 lots of 1w (1%) OTM puts with positive delta.
This spread is a neutral strategy that involves buying a number of put options and writing more put options and maturity at a different exercise price with reduced debit.
It is the limited returns with the unlimited risk options trading strategy that is executed when the options trader reckons that the underlying spot FX would experience little volatility in the near term.
1w ATM IVs are just shy above at 11.8%, and a tad below 14.25% in 1m tenor.
The long leg of the strategy would monitor major downtrend and prevailing upswings would make OTM shorts go worthless. Thereby, the total cost of the strategy would be reduced while bearish risks in the major trend would also be mitigated.
