technical technical technical

FXO Market Update - July 6

Mathias-Alrixon-400x400
Mathias Alrixon

OTC Derivatives Trading

Summary:  The 0.6925-45 support in NZDUSD held for a third time on Friday. Spot traded up to 0.7100 today before the market turned in to risk off mode and spot is back down to 0.7000 again. We like to be long NZDUSD with a hawkish RBNZ and bullish commodity market and with a strong support level just below current spot. Vols are on the low end and we like to buy 3 months 0.7100 calls and finance it with selling short dated puts with strike close to the support.


Saxo Bank publishes two weekly FX Options Market Update reports covering changes and updates on the FX Options and FX Volatility market. They describe changes in FX volatility levels, risk premium and ideas how to trade based on these.

06_MAAL_1
FX volatility, source Saxo Bank. Vol column: At-the-money volatility for the given maturity. 1w column: Change of the at-the-money volatility for the given maturity over the last week.
06_MAAL_2
Source: Bloomberg, Blue: NZDUSD spot,

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.

Spot ref.:0.7000

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.

06_MAAL_3
Source: Saxo Bank
  • The Top/Bottom charts shows the top 5 and bottom 5 values/changes for at-the-money vol, risk reversal (RR) and risk premium of the 45 currency pairs we are tracking.
  • Risk premium: Implied (Imp) minus realized volatility. A positive risk premium means implied volatility trades above realized volatility, i.e. the implied volatility can be seen as “rich”.
  • Change: The difference between current price/volatility and where it closed 1w ago.

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