BUZZ-COMMENT-NZD expectations as big RBNZ rate cut looms

Feb 18 (Reuters) - The Reserve Bank of New Zealand is expected to cut rates by another 50bps to 3.75% early on Wednesday, and unlike Tuesday's Reserve Bank Australia announcement, the FX options market isn't ruling out an FX reaction.

Overnight expiry options now include the RBNZ and related implied volatility (a gauge of actual volatility expectations) is higher. Overnight expiry NZD/USD implied volatility has increased from 12.0 on Monday to 16.0 on Tuesday, which is a premium/break-even for a simple vanilla straddle of 28 USD pips to 38 USD pips in either direction.

Overnight expiry AUD/NZD implied volatility posted a small increase to 8.5 from 5.5 when it included the RBA policy decision and 13.5 when the RBNZ came in to the mix, since easing to 11.5 as the RBA is priced out.

The premium/break-even at 11.5 is 53 NZD pips in either direction from 25 NZD pips when implied volatility was 5.5 on Monday.

Broader FX option implied volatility is heavy after recent losses, including AUD/USD and NZD/USD, which reflects the broad drop in realised volatility, improved risk appetite and the USD setback from 2-year highs.

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