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We expect the RBA to remain on hold in next week's monetary policy decision, but the RBNZ may ease again this week either on April 27th or June, particularly the rising NZD bring an April cut into play. If not in April, we mull over it far from a inevitable conclusion that the OCR will be cut again in June (which the RBNZ implicitly laid out in the March Statement).
While, leveraged accounts remained bullish on commodity currencies, led by the AUD. They raised their net AUD longs by USD0.8bn to USD3.4bn, the highest since Sep 14. They also added to their net longs in NZD, by USD0.1bn to USD0.6bn.
Although, AUDNZD is experiencing little weakness for today, we think they are just momentary and these could rather be deemed as better opportunity for shorting in the hedging strategy.
Expected RBA vs RBNZ direction in next fortnight or so, plus recent strong M&A flow into the AUD, favours AUD/NZD upside over the next few months to 1.1400+.
Technically, Aussie dollar’s continues streak of Bull Run against Kiwi dollar has come into halt at around 1.1243 and 1.1264 levels. That is where back-to-back “Long legged Dojis and Shooting Star” patterns occurred at 1.1247 and 1.1240 levels.
Although, the pair is struggling, the recent upbeat Chinese data (industrial production and GDP) and AU jobs data surprise should continue to resonate AUD in long run and this week’s Chinese manufacturing PMI likely to send some hints so as to forecast the trend in the months to come.
For now, if you compare the 1W ATM IVs with the call premiums of 1W tenors and technical swings in underlying spot FX, the prevailing bullish swings may not be having the strong momentum in rallies.
From above sensitivity table, one can see 1W ATM implied volatilities of this pair is just shy above 12.5%.
Hence, we could utilize this as opportunities for shorting overpriced calls in order to reduce the long term hedging cost of long positions in call options.
Subsequently, we recommend initiating shorts in 1W (1%) ITM call, and simultaneously 1 lot of 1M (0.5%) OTM call, thereby the strategy is to be executed at net credit.
The lower strike short calls because IV is on lower side and short term trend is slightly weaker and it finances the purchase of the higher striking call (ATM calls are overpriced, so we chose 0.5% OTM calls as well) and the position is entered for nill cost.
If market spikes dramatically our longs would likely arrest upside risks, else if it continues to drag the current dips even below in short run, then the initial premiums are to be pocketed for sure. |
