FxWirePro: Bullish/Bearish Scenarios, OTC Updates of NZD/USD and Options Strategy

Bearish NZDUSD scenarios, see below 0.61 if: 

1) The housing market slowdown becomes deeper due to credit tightening by banks; 

2) The immigration rolls over more quickly; 

3) Global risk assets start to respond more sharply to global trade and growth concerns. 

Bullish NZDUSD scenarios, see above 0.70 if: 

1) Fiscal easing is accelerated; 

2) Housing begins to lift thanks to lower mortgage rates and a winding back of LVR restrictions.

OTC Updates and Options Strategy:

Please be noted that the 3m IV skews are right indications for NZD that have clearly been indicating bearish risks. Hence, the major downtrend continuation shouldn’t be panicked the broad-based bearish outlook amid minor rallies.

These positively skewed IVs of 3m tenors signify the hedgers’ interests to bid OTM put strikes up to 0.61 levels (refer above nutshells evidencing IV skews).

The global risks are reckoned to play less conducive 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 0.61 by year-end.

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 that with ITM put instruments which are most suitable amid prevailing conditions.

3m 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. Courtesy: Sentrix & Westpac