FxWirePro: EUR/NZD bullish/bearish scenarios and knock out spreads to optimize hedging

Bullish EURNZD scenarios:

1) The ECB changes guidance in March, heralding an end to QE in Sept and hikes by 1Q’19.

2) Euro growth sustains above 3% into 2H’18.

3) Concerns about the US twin-deficit intensify.

4) The NZ housing market slowdown becomes disorderly;

5) The NZ immigration rolls over quickly;

6) NZ bank funding issues intensify, causing the market to question NZ's ability to attract capital inflow.

Bearish EURNZD scenarios:

1) Eventual repatriation by US corporates-EUR accounts for a third of foreign profits.

2) EUR appreciation delays ECB policy normalization (change in QE guidance delayed until April).

3) MS5 government in Italy or renewed elections.

4) Euro growth relapses to 2.0-2.5%.

5) NZ fiscal easing and the increase to the minimum wage drive broader wage inflation and gains in household income, boosting the inflation outlook;

6) New RBNZ Governor Orr starts with a hawkish bent.

EUR should benefit from the prospect of the ECB completing QE just as it rallied on the expectation of tapering this year.

We pair EUR vs NZD to neutralize the risk to EURUSD from a further repricing of the Fed. The RBNZ is an unlikely candidate to signal tighter policy as the slowdown in migration intensifies the downturn in housing and argues against a policy response to upside inflation risks from minimum wage increase etc. The 3m window KO halves the premium compared to a digital call.

In Sweden, the prospects of a policy pivot were delayed not derailed this year. EURSEK is currently overshooting cyclicals by over 4% the most since 2010. The rebound in inflation to 2.0% in November reduces the risk of the central bank extending QE again next week (this was 0.3% ppt higher than the Riksbank's estimate), although it could still push back the lift-off point for rates by a quarter to 3Q’18 in order to better align itself with the ECB’s extension of QE through September. 

Long a 9m 1.80 EURNZD digital call with a 3m 1.80 window KO. Paid 17.5% on November 21. Marked at 19.04%.

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