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Currency Volatility CAD Talking Points

  • NZDUSD overnight implied volatility highest since RBNZ meeting
  • Risk reversals flip to positive on the short-term tenor
  • Inflation key to upcoming RBNZ rate decision

Top 10 most volatile currency pairs and how to trade them

For a more in-depth analysis on FX, check out the Q3 FX Forecast

New Zealand Dollar Expected to be Most Volatile Currency Amid NZ CPI Report

NZD Expected to be the Most Volatile Currency

NZDUSD | As we highlighted in the weekly volatility outlook, NZDUSD is expected to be the most volatile currency. Ahead of the NZ inflation report, overnight implied vols have jumped by 4.9 vols to 12.25, which is the highest since the June RBNZ rate decision. This implies that NZDUSD ATM break-evens = 34pips(meaning that option traders need to see a move of at least 34pips in either direction in order to realise gains). Interestingly, risk reversals have flipped to positive at 0.1 (albeit relatively neutral), showing that demand is rising for topside protection in the short run.

New Zealand Dollar Expected to be Most Volatile Currency Amid NZ CPI Report

The NZ Q2 inflation report is scheduled for 23:45BST (18:45EST), where expectations are for a jump to 1.7% from 1.5%. The range for the headline rate is 1.6-2.1%, suggesting there is a risk of an upside surprise. As a reminder, the RBNZ’s preferred measure of inflation (Sectoral Factor) will be released later at 04:00BST (23:00EST), which will also be key to the near-term outlook for the central bank’s monetary policy. As it stands, money markets have attached a 73% likelihood of a 25bps cut to the OCR at the August 7th meeting. Therefore, an upward surprise towards the central bank’s 2% target could see an unwind of these bets, which in turn is likely to support the currency. However, a softer than expected reading is likely to confirm an additional rate cut from the RBNZ as they remain open to a lower OCR.

NZDUSD Price Chart: Daily Time Frame (Aug 2018July2019)

New Zealand Dollar Expected to be Most Volatile Currency Amid NZ CPI Report

On the technical front, the 200DMA is situated at 0.6714, whereby a close above puts 0.6750 in focus before resistance at 0.6780. On the downside, near-term support resides at 0.6650.

--- Written by Justin McQueen, Market Analyst

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