FxWirePro: NZD/JPY 2m skews move in line with risk potentials - Deploy options strips for smart hedging

Bearish NZDJPY scenarios:

1) The NZ housing market slowdown becomes disorderly

2) The NZ immigration rolls over quickly

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

Bullish NZDJPY scenarios:

1) Fiscal easing is delivered quickly

2) New RBNZ Governor Orr starts with a surprisingly hawkish bent.

NZDJPY’s recent peak is the latest in a series of lower peaks during the past year (refer above technical chart). The recent decline has potential to push below 74.

Medium-term perspectives: The BoJ tightening may be a long way off, but that won’t stop markets from starting to price it in, supporting the yen and depressing NZDJPY below 74 by Q2-end.

This is substantiated by the positively skewed IVs of 2m tenors, if you refer above nutshell, the skewness for the bids are for OTM puts upto 74 levels.

Contemplating both bearish and bullish trends of this underlying pair, to participate in the puzzling swings, we advocate option strips strategy that contains 3 legs of vega longs (2 puts plus 1 call). The option strips that likely to fetch desired yields regardless of the trend but more potential on southwards by arresting bearish risks.

As shown in the diagram, the execution goes this way: Initiate 2 lots of 1m longs in Vega put options, simultaneously, add 1 lot of Vega call options of the similar expiry, the strategy is executed at net debit.

One can deploy this strategy both on trading as well as hedging grounds. Please be noted that the strategy is likely to derive positive cashflows regardless of the underlying spot FX moves with more potential on the downside.

Currency Strength Index: FxWirePro's hourly NZD spot index is flashing at 72 levels (which is bullish), while hourly JPY spot index was at shy above -111 (bearish) while articulating (at 08:37 GMT). For more details on the index, please refer below weblink:

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

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