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Macro and Vol Commentary

New Zealand’s response to COVID-19 has been world leading, this has given the currency strength but what do we expect to happen next.

Economic Data

  • Business confidence in New Zealand remains negative at -14.5 for October, up from -28.5. Firms are still adjusting to the environment, and this involved adjusting to changing consumer preferences
  • The Government Wage subsidy scheme has reached $13bn and this has supported firms but this policy will start to reduce support for some firms in the coming months.
    • The Wage Subsidy supported 71% of businesses and 1.7m workers
    • This may prompt an increase in costs for firms which may lead to redundancies, or reducing hours. Recent data suggests the service sector is currently the worst affected
    • Investment plans will be subdued until certainty returns
    • Business activity has become positive once again at 3.6 for October, up from -5.4
  • The manufacturing PMI is expansionary at 50.7 in August, down from July’s figure at 59. New orders and production and production grew at a slower pace in August, finished stocks also fell to 50.
    • We saw lockdown restrictions increase in Auckland prompting downturn in economic activity and employment
    • The participation rate stands at 69.5%
  • We expect unemployment levels to rise, labour earnings are starting to fall, and job security is rising. The RBNZ’s scenario suggests we unemployment may peak in December at 8.1%
  • There is spare capacity in the labour market, which is unsurprising but we expect job losses to increase. This will prompt a reduction in consumer spending as incomes have declined
  • As the alert level moves back to level 1, card spending growth has started to trend lower as the alert level increase. Card Spending retail was up 1.2% m/m but declined -7.9% m/m, spending total m/m was 7%
  • Inflation has been capped by reduced consumption due to the level of lockdown and also rising unemployment. Indeed, businesses are reducing their pricing intentions as well which will reduce inflationary pressure


  • Government stimulus levels have been expansive and which will support GDP, but the handling of the virus has been the biggest boon for GDP
  • However, exports remain weak due to lack of external demand
  • We expect GDP to remain below pracademic levels until the earliest Q3 2021, more likely 2022. GDP is expected to fall by 5.8% in 020 according to the Reserve Bank of New Zealand
  • The initial response from the Government recovery fund has reached $50b, plus the $12bn in March brings the total to $62bn
  • Monetary stimulus is expansive, and the interest rate is 0.25%, with the 3month repo rate at 0.35%
  • The bond curve has narrowed with yields for the 10yr at 0.567%, 5yr at 0.0039%, and 2yr at 0.003%

The export market is expected to stay weak in the near term, and the trade balance fell to -353m in August from 282m in July. As the New Zealand looks to reduce the lockdown alerts from 3 towards 1 we expect economic data to improve once again. There will be more caution this time but the government have been quick learn from their mistakes and this could help prolong or prevent another level 3 alert. Tourism will remain non-existent in the near term but we expect the economy to start to recover, despite unemployment rising. The US dollar has weakened recently but global uncertainty pushed investors to the greenback. As we approach the US election uncertainty will prevail and if New Zealand is emerging with more positive data we expect to see USDNZD weaken.

Volatility Commentary 

General comments

At the start of this month we saw most macro vols vs USD jump after US President Trump’s Covid-19 diagnosis, though it appears that he is likely clear from it vols remain elevated with a volatile few weeks and month’s ahead with the US election, especially with a result likely not being clear on the night due to a much higher amount of mail in voting and a potential drawn out Supreme Court case if/when President Trump challenges the result.


Over the last few months USDNZD vols are still remained over the pre-Covid-19 levels, though vol has generally been realising lower than implied. Though the Covid-19 situation in New Zealand is largely under control, as mentioned above the New Zealand economy is facing challenges and as the global economy continues to struggle with Covid-19 (US cases remain high and much of the EU is facing a second lockdowns) we may see USD strengthening. With Global macro-economic uncertainty still being present, especially over US & EU winters, we favour long USDNZD spot and vol positions.

USDNZD 1-month Realised and Implied Volatility

USDNZD Trade Idea 

  • Buy 3m USDNZD EKI Call spread with strikes 1.5300 & 1.5600
  • Upfront premium circa 48k USD when priced in 10m USD notional a leg

Positioning Charts

NZDUSD September 14th to October 14th

The diffence between the two charts above shows a clear differnce as NZD strengthens. Chart 1 has a narrower range for options with an expiry before November 2020 at 0.63-70. The notional value of these options are smaller, and there is a moderate bias in favour of NZDUSD suggesting we could see spot push higher. Expiries in Q1 2021 have a clear split, there is a cluster of put options around 0.60 but conisderable upside coverage between 0.70 and 0.75. Both areas have larger notional values than the near dated options. In the near term NZDUSD could strengthen further but longer term outlook is not clear especially witht the US election and COVID-19.

NZDUSD August 14th to September 14th 

USDBRL Positioning Data 07/10/2020 - 14/10/2020

This week  there was littel conviction for USDBRL, volumes were low. Near term options are scattered around spot and gives no immediate directional indication. We have seen some moderate downside cover, but there are a couple of call options above 6. There are some larger options with expiries in February 2020 which are on the downside. We look for more conviction in the market this week. 

USDCNY Positioning Data 07/10/2020 - 14/10/2020

The options market favours the downisde in the near term, put options extend towards 6.50 with and expiries out to November 15th. There is little cover above 7 throughout the whole period this suggests that the options market favours the downside in the coming months, there is a cluster of put options with expiries out to February with higher notional values. Downside exposure is strong and we expect this to remain the case. 

Charts and Tables

FX Expiries 

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases



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