TRADE: Sell AUDNZD 3m Straddle - Rec 2.74% at expiry
or buy 3m DNT with 1.0200, 1.0750 barriers for 19% cost
Looking at implied-realized spreads within the G10 commodity FX-cross space across 3m tenors, CADNOK vols has finally moved higher in benefit of breakout-minded managers of 6.000 on spot towards potential longer-term mean-reversion from historic 20y+ highs, with NZDNOK and AUDNZD on our radar on whether vols can move lower
NZDNOK risk premium of ~2.20 vol points
AUDNZD risk premium of ~1.70 vol points
We suggest against selling NZDNOK vols despite having a higher risk premium than AUDNZD, as chances we'd see a range in the pair is challenged with the notion of fighting carry, which has kept the pair elevated in a strong upward trend.
However, with AUDNZD, we think it is unlikely we see both the RBA / RBNZ doing much for next 3m, and given passing of base effects, it is a likely reaction function for BOTH CB's to wait and see if inflation does materialize higher than to continue to cut, which may cause FX to range-trade in short term.
Looking at the AUD and NZD 3m6m OIS curve, we are recently seeing a steepening towards a flat term structure across the two maturities, suggesting that the prospect of rate cuts are gradually being priced out in both, and NZD's steepenign specifically, may suggest that RBNZ's lagged easing vs the RBA that started in mid 2015, may have also have halted, ie both CB's are now very likely on hold bias from now.
A simplified overlay of core-CPI spread between AU and NZ vs AUDNZD FX argues that spot should be much higher, however we believe this metric may be of little value in that we did not see this materialize the RBNZ to being more dovish than the RBA in the 2012 cutting cycle, and as such is worth discarding for short term FX trajectory.
The popularity of being long around 1.0250 this year was on the notion of a diverging rates spread vs FX (AU rates more paid than NZD and FX as a laggard) and long term historical lows. We note that the rates spread has halted its surge higher and is likely to range-trade which we think limits its value for FX dislocation currently.
3m short straddle b/e's at 1.0750 and 1.0200 receives 2.74% at expiry. For managers concerned over global move higher in vol, DNT with barriers same as straddle over 3m has 5:1 leverage.