3. From a USD demand point of view, last week we saw USD lose 160pips against the NZD as Brexit Uncertainty negatively hit the Feds Rate hike cycle expectancy, flattening the curve in the front end which ruled out any hikes until Dec or 2017, fewer hikes = less USD strength.
- However, since the beginning of the week where brexit risks ruled out hikes in the near term, the end of the week managed to turn rate hike expectations around as Brexit likelihood decreased/ shifted into 2017. This helped the Fed fund futures curve recover/ steepen somewhat in the front end, with the implied probability of a hike increasing from 0% to 5.9% for both September and November, whilst the probability of a hike in December also steepened significantly from 13.3% to 22.3% with the probability of a 50bps hike being priced for the first time at 1.1%. This trend of Fed Hike recovery is likely to continue as long as Brexit risks remain subdued, so we can expect USD to begin to price stronger in the coming days/ weeks.
4. Technically, NZDUSD trades 100pips away from a key handle at 0.73 which is a double top and may provide the ideal short area. Further, 0.73 is also the 12 month high which increases this levels probability of a price reversal. I dont see NU trading to the next level at 0.76+, however if it does trade above 0.76, I think the market has a much more hawkish view of the RBNZ than mine and have significantly de-priced Brexit risks.
5. Volatility - 1wk, 1m & 2m (-1.31, -1.35, -1.79) NZDUSD Risk Reversals all trade with a downside bias indicating put/ downside demand is higher than upside, so the option market net speculates, or is hedging for, NZDUSD to come down over the above tenors.
- NZDUSD 50 delta ATM Implied volatility is trading ABOVE realised volatility across the curve 1wk, 1m, 2m where currently IV is at 12.30% 12.49% & 13.04% vs realised at 6.97%, 13.84% & 12.20%, this difference implies > volatility is expected in the future vs now which supports selling - higher vol is generally associated with bear markets.
Trading Strategy:
1. Watch the 0.7300 level closely, if it holds place 2lot short on NU, if it fails, watch the 0.76xx level and if it holds place 3-4lot short NU - however if 0.73 falls I question the markets pricing of brexit/ RBNZ rate cut (not likely).
--- TP Levels should be at 0.70xx, 0.67xx or 0.66xx dependent on your strategy, I think all are achievable in the long-run + 6wks
---SL Levels should be STRICTLY above the resistance entry levels e.g. 20/30pips above 0.731
2. To hedge and exploit this view the best way, you combine Long USDJPY (risk-on trade) AND Short NZDUSD (risk-off trade), where imo both can be winners but this dynamic hedge could be used to pmax both possibilities.
3. Offers great risk-reward, more than 20:1 if stops are placed correctly only 20-35pips of risk but 700pips of reward potentially.