FxWirePro: NZD/USD bearish scenarios and potential risk events - Bid 3m/6m IV skews and optimize hedging via put ratio back spreads

Bearish NZDUSD scenarios below 0.67 if:

1) The housing market slowdown becomes disorderly;

2) The immigration rolls over quickly;

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

Potential trigger events:

GDT auctions – 5th Jun

RBNZ FSR: 30 May

ANZ business survey (May): 31 May

Terms of trade (1Q): 1 Jun

NZDUSD continues to consolidate in the 0.6850-0.6975 area, utilize this as shorting opportunity.

The medium-term perspectives:  The US dollar should strengthen further if the Fed hikes twice more this year, and that will push NZDUSD lower. 

Bids on 3m skews have come in quite worthy, as they signaled the hedging interests for further bearish risks. Thus, we expect NZDUSD to depreciate to USD 0.6650 by end of 3Q’19. Accordingly, we’ve recommended diagonal put ratio back spreads in order to participate both momentary upswings in the consolidation phase and anticipated downside risks.

Writing 1m at the money put with positive theta snaps decisive rallies, you could easily make out short legs on ATM puts would go worthless considering time decay advantage. Simultaneously, we uphold 2 lots of longs in 3m 1% OTM puts, the structure could be constructed at net debit.

It was explicitly stated that “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.”

Well, for now, the medium term perspectives of this pair seems to be bearish as the US dollar remains in a two-month-old sideways range, which means further sideways ranging in NZDUSD is possible during the month ahead.

Further out, though, we are bearish. The NZ-US interest rate advantage is rapidly shrinking and should eventually weigh, pushing NZDUSD towards 0.68 by mid-year (i.e. 1m skews).

Moreover, the 6m skews are targeting towards OTM put strikes at 0.65 (refer above nutshell) which is in line with the above-mentioned projections.

Hence, on hedging grounds, the option the holder of OTM puts still desirable and is deemed to be on upper hand.

Currency Strength Index: FxWirePro's hourly NZD spot index is inching towards 103 levels (highly bullish), while hourly USD spot index was at shy above 68 (bullish) while articulating at 07:53 GMT. For more details on the index, please refer below weblink:

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

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