FxWirePro: Kiwi seems more bearish as RBNZ more dovish than RBA – 3-way straddles for wedged AUD/NZD trend

The RBNZ OCR review and the Fed’s rate decision have delivered as widely anticipated, Fed hiked 25 bps and RBNZ maintained status quo in its monetary policy, both data during this week are suffice to foresee further downside risks for the NZD. 

Well, on a broader perspective, we still remain bearish in major NZD crosses, with NZDUSD that is targeting 0.6200 or lower by year-end, while AUDNZD has been stuck in a range-bounded trend of 1.1019 – 1.0850 for the past couple of months with no strong directional clues for the week ahead. The main factor is an expectation the US dollar will rise further as the Fed raises rates further and US economic growth remains strong. In addition, the yield spread between US and NZ should move further in the USD’s favour – we expect the Fed funds rate to be 125bp higher than the OCR (3.00% vs 1.75%) by the time the Fed completes its hiking cycle in mid-2019. 

The AUD has been hurt more than NZD by the US-China trade war, that is posing some resistance to AUDNZD. Trade war noise aside, though, yield and commodity price differentials argue for a higher cross. There’s no major event on the Australian calendar this week. 

But we remain unbiased but slightly bullish favor, edging higher towards 1.1250 by year-end. Medium-term factors weighing on this cross are the dovish RBNZ compared to the RBA, AU’s economic growth outperformance, and (so far) the outperformance of AU commodities compared to NZ’s.

Options Strategy:

Contemplating above aspects, AUDNZD is projected to be stuck in a range-bounded trend in the weeks to come with some upside bias for the week ahead. Accordingly, we advocate initiating longs in 1M AUDNZD at the money -0.49 delta put, and go long in at the money +0.51 delta call of similar expiry and simultaneously, short 2w (1%) out of the money put options. Thereby, we remain unbiased hedging but favor slightly on upside risks as short leg likely to reduce long legs.

Currency Strength Index: FxWirePro's hourly AUD spot index is flashing at -47 (which is bearish), while hourly NZD spot index was at 12 (neutral) at 09:27 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex