Broadly, my views are quite light right now, no overly strong conviction ideas in any asset but still got some ideas to share. Firstly comes from the event risk we have this week - The FOMC meeting. Now no one is expecting a rate hike, and that's fair enough, whilst technically a "live" meeting its highly unlikely. What we should expect from this though is for them to confirm/kill the idea of a Dec hike. One issue that the Fed faced in September was financial volatility (be it the VIX/SPX or whatever), that is a clear obstacle that has passed us now with the SPX upwards of 2070, and as such these financial conditions are back to pre-summer levels.
|SPX vs VIX|
Looking at a 2y zero-coupon inflation swap, we currently see 1.06%, which may be around what we realize, but going through year end I would prefer to pay inflation at these depressed levels.
|US 2 year inflation swaps|
|Fed Funds Jan contract|
Alternatively I would look to UK rates market to liven up post FOMC, with the short sterling curve as its flattest levels of the year, getting into steepeners here offers good levels as well as a strong play off any potential hawkish-ness that arises from the Fed.
|Short sterling Curve Jun '16-17|
|Average weekly earnings, at post crisis highs.|
As a short term position, a 25 delta put, 0.6650 (against spot ref of 68) for 1 week trades at about 70NZD pips, which on the surface seems quite expensive, so would be interested in selling some 70 strike calls against this to cheapen our downside as I see limited chance of the RBNZ doing anything to meaningfully leave the NZD higher. Obviously with the FOMC so close, one should look to a better cross, maybe AUDNZD, which in itself is looking rather cheap, at least against rate spreads, here I would look to longer dated (>3m) bullish option structures, such as 1.10 digi calls (which costs around 35% of notional, with a knock-out at 1.04 this cheapens to 25%)
|audnzd VS 2 year spread|
In NZD rates, its more mixed, with 3m OIS sat at 2.6670, or approx in the middle between hike/no hike. However given the path of the NZD and RBNZ rhetoric I would expect to see a further cut towards 2.50 before year end. It still seems attractive to recieve NZD rates, albeit much less so now than before, though there is very little chance in my eyes that we see an even semi-hawkish RBNZ with the NZD sat here and data only "meh" at best.
Just a relatively short one to start with, hopefully i can get into the rhytm of a weekly piece again which should be fun, but these are just my thoughts on potentially hawkish fed / dovish RBNZ.