Barclays Trade for the week ahead: Short NZD/USD via risk reversals

Underpriced RBNZ easing this year (market pricing 36bp, our forecast: 50bp), in addition to our expectations for downward revisions to the Bank’s growth forecasts at its September MPS, skew the risks towards further NZDUSD depreciation, in our view. Moreover, the still-elevated skew and sharply inverted vol curve suggest an opportunity to express a bullish USD view via options. We see multiple reasons for increased volatility in commodity currencies in the coming months, in the context of declining commodity prices and downside risks associated with China. We recommend initiating a 4m NZDUSD risk reversal (put purchase/call sale) for a cost of 35bp (strikes: 0.66, 0.5926, spot ref: 0.6315, atm vol: 13.61%). The 4m structure covers three RBNZ policy meetings, as well as the December Fed meeting. If we are correct, the option structure should gain value from the expected downward move in spot and pickup in forward volatility. Technically, our bearish view for NZDUSD was encouraged by the recent break below support in the 0.6470 area. We now expect an extension of the year-long falling trend towards our initial targets near 0.6200. Beyond there, we see room for further downside towards 0.5900, the target of a multi-year topping pattern (Figure 1).

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