The NZD/USD has increased significantly since the beginning of February as market has priced in nearly 100bp hikes on a 1Y horizon from RBNZ. In our view, current pricing of RBNZ seems a little excessive. Our short term financial model indicates that NZD/USD currently is overbought and in addition, 1 month implied volatility looks expensive when evaluated by a z-score of differences between implied and realised volatility. Therefore, we recommend selling a 1M 0.8500 call option ahead of the RBNZ meeting tonight.
Looking at the signals from our short-term financial models, the biggest misalignments is currently seen in EUR/PLN which trades 1.9 above model estimate. We have decided to utilise the move higher in spot to take an early profit on the bought 4.20 call option that we recommended in the latest issue of FX Market Update (27 February 2014). Besides a move higher in spot, the strategy has also benefitted from an increase in implied volatility and we close the position with a profit of 0.40%.
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