The 0.6925-45 support held for a third time in NZDUSD on Friday and we saw a strong bounce off the support after NFP as the dollar was sold off. We see a good chance for a move higher in spot from here with a hawkish RBNZ and bullish commodities. The 0.6925-45 area should continue to limit the downside and first resistance comes in at 0.7100 and then 0.7310 followed by the YTD highs at 0.7465. NZDUSD opened strong today and touch 0.7100 before trading lower as the risk appetite deteriorated, and the dollar traded stronger.
Vols trades at the low end looking at YTD data with 1 month at 8.9, compared to a YTD mean of 9.5 and a low of 7.70 and 1 month implied vol trades with a 0.5 vol discount to realized vol. 1 month risk reversal trades at 0.75 for puts and has been trading between 0.5 and 1.0 for the last 3 months.
We like to buy NZDUSD calls for a move up to 0.7300 and prefer to buy a bit longer dated to give spot time to get there. The call can be financed with selling short dated puts with strikes close to the support at 0.6945 and keep re-selling as long as they give a decent premium.
Buy 3 month 0.7100 NZDUSD call
Cost 82 pips
Sell 1 week 0.6950 NZDUSD put
Receive 13 pips.
Further financing can be done by doing a call spread, for example selling a 3 month 0.7300 would give 24 pips in premium which is around 30% reduction of the price if just buying the 0.7100 strike. We prefer to wait selling calls until spot has moved higher and selling puts with strike close to the support level does not give enough premium. For example, if spot trades at 0.7100, selling 1 week 0.7000 would only give 3 pips premium with the current volatility. At that point and depending on the market momentum we would consider selling a call instead of short dated puts. A 3 months 0.7300 call would give around 43 pips with current volatility and spot at 0.7100.