Volatility Strategies Around The Fed Decision
With the Federal Reserve’s decision imminent, we are bracing for a potential spike in volatility. This uncertainty currently favors the US Dollar and is weighing on the NZD/USD pair around the 0.5820 level. We believe using derivative strategies, such as a short-dated straddle, could be an effective way to capitalize on a sharp price move following the announcement, regardless of the direction. Once the Fed’s path is clarified, we expect implied volatility to decrease significantly. Historically, volatility tends to collapse after such high-impact events, presenting an opportunity to profit from time decay. Should the NZD/USD pair settle into a new range, we would consider selling options premium to take advantage of this normalization.Policy Divergence And NZD/USD Outlook
Looking into the coming weeks, the key driver will be the policy divergence between a hawkish Reserve Bank of New Zealand and a patient Federal Reserve. Overnight index swaps are currently pricing in an 85% probability of a 25-basis-point rate hike from the RBNZ on July 8. This fundamental backdrop provides underlying support for the New Zealand Dollar. Given this divergence, we see a basis for a cautiously bullish outlook on NZD/USD heading into July. With recent US inflation data holding firm around 3.1%, the Fed is unlikely to signal any policy easing, making the RBNZ’s expected hike a more dominant factor. We find that purchasing call options with an August expiration offers a defined-risk method for positioning for potential strength in the Kiwi dollar.Start trading now — click here to create your real VT Markets account.
