FxWirePro: EUR/NZD bullish/bearish scenarios and derivatives trades perspectives ahead of ECB

Bearish EURNZD Scenarios:

1) ECB goes all-in with rates cuts, tiering and QE. 

2) Trump proceeds with tariffs on Euro car imports. 

3) A no-deal Brexit.

4) Kiwis fiscal easing is accelerated;

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

Bullish EURNZD Scenarios:

1) Trump sanctions unilateral FX intervention to weaken USD. 

2) A US-China peace treaty on trade. 

3) Euro area economy rebounds to a sustained 1.5%+ growth rate and re- acceleration of CB demand for EUR.

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

5) The immigration rolls over more quickly; 

6) The global risk assets start to respond more sharply to global trade and growth concerns. 

OTC outlook and Hedging Strategy: 

Please be noted that the positively skewed IVs (implied volatilities) of 3m tenors signify the hedgers’ interests on both upside and downside risks (refer above nutshell). Bids for OTM calls and OTM put strikes up to 1.71 and 1.62 levels are observed ahead of ECB monetary policy that is scheduled for tomorrow.

Contemplating all the above factors, we could foresee upside risks of this pair. Hence, we advocate 3m (1%) in the money delta call options.

Thereby, in the money call option with a very strong delta will move in tandem with the underlying spot fx.

Alternatively, we also advocate directional hedges as downside risks in the near terms are foreseen ahead of ECB’s monetary policy, initiate shorts in EURNZD futures contracts of near month expiries and simultaneously, longs in mid-month tenors with a view to arresting major uptrend. Courtesy: Sentrix & JPM