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New Zealand Dollar Expected to be Most Volatile Currency Amid RBNZ Rate Outlook

New Zealand Dollar Expected to be Most Volatile Currency Amid RBNZ Rate Outlook

2019-11-12 10:40:00
Justin McQueen, Analyst

Currency Volatility NZD Talking Points

  • NZDUSD overnight implied volatility highest since May
  • Eyes on Forward Guidance if RBNZ Cut

Top 10 most volatile currency pairs and how to trade them

For a more in-depth analysis on FX, check out the Q4 FX Forecast

New Zealand Dollar Expected to be Most Volatile Currency Amid RBNZ Rate Outlook

NZD Expected to be the Most Volatile Currency

NZDUSD | Across the G10 complex the New Zealand Dollar is expected to be the most volatile currency as market participants look ahead to the RBNZ rate decision. Overnight implied volatility has surged over 8vols to 17.70, highest since the RBNZ rate decision in May. As such, the break-even straddle for NZDUSD = 46pips(meaning that option traders need to see a move of at least 46pips in either direction in order to realise gains). Elsewhere, risk reversals show only a marginal premium for NZD calls over puts in the 1-day tenor, however, risk reversals have edged lower both in the 1-week and 1-month tenors.

New Zealand Dollar Expected to be Most Volatile Currency Amid RBNZ Rate Outlook

The RBNZ rate decision is scheduled for 0100GMT, where money markets are pricing in an 82% chance that the central bank will lower interest rates by 25bps to 0.75%. Much of the increase in rate expectations recently had been attributed to the uptick in the unemployment rate in last week’s labour market report, while the fall in inflation expectations had also raised the expectation that the RBNZ will deliver another cut at today’s decision. However, the RBNZ Shadow Board had highlighted that the rate decision is not as clear cut with the consensus calling for rates to be on hold.

Forward Guidance is Key to Initial Reaction

Focus will also be on the forward guidance as to whether the RBNZ will signal that it will be on hold for the near-term following today’s decision. Of note, lessons can be drawn from the May rate decision, whereby the RBNZ cut the OCR by 25bps but had signalled that the “outlook was more balanced for interest rates” thus ultimately sparking upside in the NZD. However, a more dovish reaction would likely stem from the RBNZ cutting interest rates but also maintaining its stances that rates can be lowered if necessary.

NZDUSD Price Chart: Daily Time Frame (Jun 2019Nov 2019)

New Zealand Dollar Expected to be Most Volatile Currency Amid RBNZ Rate Outlook

Source: IG Charts

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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