FxWirePro: Kiwis to underperform through H1’2018 despite minor uptrend – Capitalize on 1-3m skews combinations to execute put ratio back spreads

NZDUSD in minor trend: A stretched NZD looks set to continue to consolidate around recent ranges 0.7250 to 0.7320 with a bias to the upside in the minor trend.

NZDUSD medium-term perspectives: The near-term potential to reach the 0.7400-0.7500 area during the weeks ahead if the US dollar remains depressed. However, if the RBNZ remains firmly on hold throughout 2018 and the US dollar eventually rises on the expectation of further Fed interest rate hikes in 2018, then the pair should drop back to 0.67 by end of Q1’2018.

The Kiwi is expected to lose its pole position in terms of offering the highest central bank policy rate in G10 next year, and this should keep the currency a laggard. Moribund milk powder prices should also continue to drag on the currency (refer above graph). The AUDNZD's gradual upward trajectory remains on track, but the NZDUSD would be supported by the US dollar's secular decline.

OTC Outlook and Options Trade Recommendations:

At spot reference: 0.7292, since the 3m skews are targeting towards OTM put strikes at 0.70, whereas 1m skews signal hedging interests both the sides, we’ve recommended put ratio back spreads in order to participate both momentary upswings in the consolidation phase and anticipated downside risks.

Please noted that the 1% out of the money puts of 1m tenors are exorbitantly priced over 17.6%, whereas this pair has been no exception from low vols environment, 1m IVs are just shy above 8.92%. Hence, the option premium of this OTM put is deemed as the overpriced instrument. Lower IV environment while rising underlying spot sentiments would be conducive for option writers of such overpriced puts.

Hence, the strategy reads this way - writing 1m (1%) in the money put with positive theta snapping decisive rallies, you could easily make out short legs on OTM puts would go worthless considering time decay advantage. Simultaneously, we uphold 2 lots of longs in 3m 1% ITM puts, the structure could be constructed either at net debit.

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 -19 levels (bearish), while hourly USD spot index was at shy above -101 (bearish) while articulating at 07:24 GMT. For more details on the index, please refer below weblink:

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

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest