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Derivatives

Kiwi/Greenback Low Sparks Put Buying Rush

The New Zealand dollar hit a three-month low against the U.S. dollar last week, prompting an uptick in implied volatility and a rush to buy downside kiwi puts.

The New Zealand dollar hit a three-month low against the U.S. dollar last week, prompting an uptick in implied volatility and a rush to buy downside kiwi puts. The cross was at USD 0.59403 as DW went to press Thursday, down from USD0.6058 the previous Friday after a stream of weak economic data from New Zealand took its toll.

An fx salesman in New York said his firm saw interest from speculative clients in starting to put on medium-term downside NZD/USD positions. Three-month kiwi puts with strikes around USD0.58 were most common. There was little interest in shorter dates, he noted, with the U.S. July 4 vacation approaching and liquidity slackening because of the soccer World Cup.

USD0.60 was a big psychological barrier, explained a trader, and this was breached Wednesday when figures were released showing New Zealand's trade deficit had slumped further into the red than fx players expected, reaching NZD104 million. Once this was broken, implied volatility jumped to 12.5% for three months, compared to 11.5% the previous week. This was in contrast to a general dampening of volatility across other major currency pairs, where trading was still settling after U.S. interest-rate concerns raised volatility across the board in May.

Naomi Fink, fx strategist at BNP Paribas in New York, said the firm is expecting further downside for the Kiwi/dollar and so further upside for implied volatility on the pair. "I would not sell implied volatility here," she noted. "There's probably even further upside potential for vols if we do see a sudden decline in commodities," she noted, explaining implied volatility on the pair is already at a premium to other commodity currencies.

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