FxWirePro: Kiwis delivers leftover gains on GDP, 3m skews to OTM put strikes – Wise NZD/USD hedging via put ratio spreads for lingering downside risks

NZDUSD medium-term perspectives seem to have delivered its gains in its consolidation phase. NZD preserved its post-GDP gains to 0.7020-50 levels. While AUDNZD rose from 1.0940 to 1.0980.

The New Zealand economy advanced 0.6 percent on quarter in the third quarter of 2017, below the upwardly revised 1.0 percent expansion in the previous period but slightly above the 0.5 percent growth expected by the consensus. Slower growth was mainly explained by a 1.6 percent contraction in utilities, following no growth in the second quarter. Meantime, services grew at a softer pace of 0.6 percent after a 1.0 percent expansion in the previous quarter. In contrast, construction rebounded sharply.

Retains upward momentum, the next technical target 0.7035 (15 Dec high), as long as the USD remains restrained.

If the RBNZ remains firmly on hold, as we expect, and the US dollar rises on the expectation of further Fed interest rate rises in 2018, then we reckon that NZDUSD should drop back to 0.67 over the next few months, the OTC indications are also suggesting the same.

If the Kiwi central bank remains firmly on hold, as we expect, and the US dollar rises on the delivery of a Fed interest rate rise in December, then NZDUSD should fall to 0.67 by year-end.

OTC Outlook and Options Trade Recommendations:

All the factors stated above seem to be discounted in FX options market, please glance through nutshell evidencing IV skews that signify hedger’s bearish interests in next 3-months timeframe. Positively skewed IVs of this tenor signal underlying spot FX is expected to be lowering southwards as the skews have been flashing positive numbers on OTM strikes upto 0.68 or below.

At spot reference: 0.7019, since the 3m skews are targeting OTM put strikes at 0.68, accordingly, we’ve recommended put ratio back spreads in order to participate both momentary upswings in the consolidation phase and anticipated downside risks.

Hence, we recommend writing 1m (1%) in the money put with positive theta snapping decisive rallies. You could easily make out short legs on ITM puts would go worthless considering time decay advantage. Simultaneously, we uphold longs in 1m ATM and 1% out of the money puts, the structure could be constructed either at the zero cost or minor debits. Please observe pay-off structue would be inversely proportionate to the spot FX moves.

Bearish scenarios: NZDUSD forecasts of the slide below 0.67 is majorly driven by:

1) The housing market slowdown becomes disorderly

2) The migration rolls over due to a shift in government policy;

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

Theta shorts are recommended in this strategy because Theta is not a constant, it changes as the underlying market moves and time passes. Theta is the sensitivity of an option’s value to the passage of time. It is usually expressed as the change in value per one day’s passage of time.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 45 levels (which is bullish), while hourly USD spot index was at -69 (bearish) while articulating (at 06:36 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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