FxWirePro: NZD/USD balanced IV skews to substantiate macros - Deploy Credit Put Spreads for aggressive bears and calendar straddles for risk averse

In China, we have Caixin PMIs out for June month after surprising to the low side in May at 49.6, however, the parallel Jun national PMI measure did rise 0.5pts last Friday to 51.7.

NZDUSD in short run could push higher towards 0.7375 - 0.74 levels (Feb high) but getting stretched.

While in medium term perspectives, the Fed’s tightening cycle plus US fiscal expansion should eventually reassert upside pressure on US interest rates and the US dollar, pushing NZDUSD below 0.6800 by year end. US factors should outweigh local factors which are mostly supportive.

Technically, NZDUSD rally from the May low has clearly been more impulsive than anticipated after effectively holding the critical .6800 support area (Sept’15 trendline and 61.8% retracement from January’16 lows).

Option Trade Recommendations:

All the factors stated above seem to be discounted in FX options market, you could make out this in mounting bearish risk sentiments as you could see the positively skewed IVs in OTM put strikes of 1m tenors (refer positive IV skews indicate the strikes below 0.73 which is our forecasts).

The NZD volatility market normalized sharply (you could observe that in NZDUSD IV skews across all tenors) and IV skewness is quite favorable for OTM put option holders amid ongoing bullish swings, hence, we eye on writing overpriced in the money put options that are likely to reduce hedging costs of long legs.

Well, the positive skews in 2m implied volatilities signify hedging interests in downside risks further and the combination of IV 2w2m skews suggest credit put spreads that is likely to favor both upswings in short run and major downtrend.

At spot reference: 0.73, one can also deploy diagonal credit put spreads by writing 2w (1%) in the money put while initiating longs in 2m at the money put, the structure could be constructed at the net credit.

Alternatively, calendar straddles are suggested for risk-averse foreign traders. To deploy this strategy, use 1m at the money -0.49 delta put, while 2m at the money +0.51 delta calls. This option set up is likely to arrest potential risks in underlying spot FX regardless of the swings.