FX Options Weekly

Macro and Vol Commentary

The pair began to weaken from the highs of 0.65 in late January on the back of cyclone Gabrielle as well as softening pace of tightening from the RBNZ. With central bank moves out of the way, what is the outlook for NZDUSD in the near term?

New Zealand Economy

• Economic performance in New Zealand continues to underperform.
  • Business PMI bounced back into the expansionary territory at 50.8 in January; however, the extent of the jump was below market expectations.
    • Activity outlook and business confidence are recovering from the recent lows but still remain contractionary.
  • Retail sales continued to weaken, falling by 0.6% q/q in Q4’22; this is down from the previous month’s level of 0.4% and a consensus figure of 0.2%.
    • We expect this figure to be weaker when adjusted for inflation.
  • At the same time, to finance the expenditure, consumers are relying more on loans, with credit card spending increasing by 17.9% y/y in January.
• Unlike the US, New Zealand consumers are struggling under the weight of higher prices and elevated interest rates.
• Housing market continues to weaken, and prices fell by 7.2% y/y in January.
  • We expect the price contraction to soften, given the softer hawkish tone from the central bank, but to remain negative y/y for the majority of the year before a slight reversal by the year-end.
  • Purchases, however, are yet to feel the pain of higher interest rates.
    • The full impact is yet to be felt because many households are on fixed-rate mortgages that have yet to roll over onto a new, higher rate.
    • The average 2yr rate was 6.6% in December from 4.25% a year earlier.
• Likewise, the labour market is showing signs of softening, with the jobless rate ticking up to 3.4% while quarterly employment growth of 0.2% missed the 0.3% estimate.
  • While the labour market remains tight, exacerbated by strict lockdown conditions, companies are signalling the appetite to scale back on hiring as the economy slows.
• Inflation reading settled at 7.2% in Q4’22, remaining broadly unchanged from a similar reading in Q3’22, which is only 10bps lower than recent highs.
  • Whilst the reading is below the RBNZ estimate, the historic strength points to further tightness from the CB.
  • Wage inflation accelerated to 4.3% y/y, the series highs, as an acute labour shortage has been fuelling price pressures on employers to lift pay to retain workers.
    • This could create upside pressures for inflation in 2023.
  • The recent cyclone Gabrielle has added pressure on economic performance, costing billions for the economy, and restructuring activity is set to take place in H2’23, further weighing on inflation pressures.

RBNZ

• The CB began to hike rates in October 2021 and has accelerated the pace of tightening throughout 2022, with hikes averaging at 50bps.
• In its latest meeting, the CB increased interest rates by 50bps, up to 4.75%.
  • Whilst a robust increase, this is down from 75bps seen in the November meeting.
• This slowdown in rate hikes opens the door for further softening in tightening from RBNZ.
  • The implied rates now point to no chance of another 75bps rate hike, and markets instead bet on a 33bps increase in May.
• RBNZ is poised to remain hawkish in comparison to western counterparts, given its resolve to quell inflation.
  • As a result, we anticipate an accelerated contraction in 2023.
• We expect RBNZ to peak at around 5.25-5.50% and, in line with the US, keep the rates higher for longer before pivoting the monetary policy late this year or early next year.

Weakening economic data opens the door for the RBNZ to slow down on the pace of hikes in the coming months. However, given inflation reading releases are done on a quarterly basis, attention will be pointed towards inflation expectations and other economic data releases instead to help guide policymakers. New Zealand's economy is responding much quicker to the tightening cycle than the US: retail sales are declining, the labour market is softening, and overall sentiment remains muted. We anticipate the rate of hikes to slow down and for policymakers to stick to higher-for-longer rhetoric until the year-end. A smaller hike in February brought RBNZ closer to global peers that have slowed the pace of tightening, and NZDUSD benefitted slightly from that. Still US economy remains robust, and we expect NZ data releases to come in slightly weaker once again, weighing on the pair in the near term back to test the 0.6 level (1 month).

Sources: S&P Global, Bank of New Zealand, Real Estate Institute of New Zealand, Statistics New Zealand

Volatility Commentary

For the first time in three months the market is overpricing realised volatility and we are seeing implied vol edging slightly higher. We are unsure whether this trend will continue, however given the current condition, we know that volatility premiums are currently slightly overpriced hence selling vol and collecting premium is our current position. However we still believe given the current market sentiment towards the dollar, followed by NZD weak economic data in retail sales, housing market, labour market and the upward pressure from inflation. We believe the tight monetary pressure coming out of US followed by the weak sentiment in NZD will push the NZDUSD rate lower in the short term. Below we suggest a trade idea that collects premium from selling IV and using the proceeds to finance our downside view. 

NZDUSD Trade Idea

• This is known as a collar. You sell a Call strike 0.6250. Buy a Put at strike 0.6200.
• Notional 5m each leg
• Expiry 3m: 01/06/2023
• Spot ref: 0.6263
• You rec Approx 24k USD for this structure.

Positioning Charts

USDBRL NDO Positioning Data 16/02/2023 - 23/02/2023

The size of notional value reduced sharply in the week ending March 2nd, suggesting diminishing appetite from both call and put options. There is still some upside cover present above 5.50-5.70, and with calls building in these levels in March, this could support the rally if prices gain traction. Puts are expiring at current ranges of 5.00-5.10. The number of options remained broadly unchanged, suggesting unchanged participation in the market, but lower notional size points to less conviction in the market out of the current levels.  

USDBRL NDO Positioning Data 23/02/2023 - 02/03/2023

USDCNY Vanilla Positioning Data 16/02/2023 - 23/02/2023

Appetite for USDCNY has increased slightly in the week ending March 2nd, with both the number of calls and puts growing. Upside cover above 6.90 was extended, with more calls building at 7.00-7.20 range. Likewise, puts are seen concentrated in two areas: current range around 6.90 and down around 6.70, where the size of notional is also greater. Still, markets seem uncertainty about the direction of USDCNY in the near term, and March range is large and well covered from both sides. 

USDCNY Vanilla Positioning Data 23/02/2023 - 02/03/2023

NZDUSD Vanilla Positioning Data 02/01/2023 - 02/02/2023

NZDUSD saw down appetite grow in recent week, with a larger number of puts building in the month ending March 2nd. There are expiries at around 0.6-0.7 levels, and the number of upside cover has diminished into this range, suggesting market conviction for these levels in the near term. There is a big put expiry taking place at 0.6 by the end of June, and appetite following this date is seen diminishing in comparison to options that we saw trading in the month ending January 2nd. Market seems comfortable in the 0.6-0.7 in the near term, but the number of puts is overwhelming the calls, and we expect to see marginal downside in the near term. 

NZDUSD Vanilla Positioning Data 02/02/2023 - 02/03/2023

Charts and Tables

FX Expiries

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Charts

JP Morgan Global FX Volatility 

 

The index weakened sharply in recent days, falling below the robust support level of 10.00 to settle at 9.79. The index found support at this level today. The stochastics are continuing to fall, and momentum is seen continuing on the downside. The %K/%D is falling into oversold, and the MACD diff is positive and converging. The moving average levels are now providing robust resistance levels on the upside, and the index would first need to break above these levels before testing 10.40 once again. Alternatively, appetite below current levels could set the scene for 9.79 and 9.50 in the longer term. We expect some downside in the near term; the moving average levels should provide robust resistance.

Dollar Index 

 

The index jumped higher in recent days, but resistance at 105 held firm, and now the index is at 104.85, and the level is now back supported by 50 MA. The indicators point to a downside shift, with %/K%D diverging on the downside near overbought, and the MACD diff is positive and converging. To confirm the acceleration of the downside trend, the index needs to break below the support of 50 MA at 104.63 before testing other moving averages at 104.12 and 103.18 for 100 and 200 MA, respectively. Alternatively, if the longer-term downside trend is to persist, we could see levels test 105 and then 105.35 once again. The indicators point to a build-up of downside momentum in the near term, and we expect to see prices breach 50 MA. However, the longer-term moving averages will cap any strong downside momentum, and the index will continue on a marginal downward trajectory in the longer term.

NZDUSD

 

The pair weakened at the start of the month, finding support at 50 MA, and has continued on an upward trend once again in recent days. Today’s candles are edging higher to a higher upper trend but, once again but showed a lack of appetite to break above it, with narrower-bodied candles and long upper shadows. The indicators point to a growing trend on the upside, as stochastics are converging on the upside, and the MACD diff is positive and now diverging. The next robust level on the upside is at 0.6250, and if the pair breaks above it, we could see future gains to 0.6300. On the downside, if 50 MA at 0.6208 is broken, this could suggest further impetus to 0.6200. We expect NZDUSD to find resistance at trend levels.