NZD/USD Risk Reversals: Bear Trap?

The NZD/USD dropped to a low of 0.7231 this Wednesday morning after the New Zealand Treasury revised growth forecasts lower. At the time of writing, the currency pair traded around 0.7240 and looked set to test head and shoulders neckline support of 0.7226. 

Risk Reversal remains resilient, Vols rise

• The one-month 25-delta risk reversal bottomed out at -1.331 on Aug and currently stands at -0.90. During the same time frame, NZD/USD has dropped from 0.7314 to 0.7226. 
• Meanwhile, the one-month ATM volatility gauge has jumped to 8.788; the highest level since August 7. 
• The improvement in the risk reversal from -1.331 to -0.90 indicates falling demand for downside protection, i.e. Put options. 
• The divergence between the risk reversal and NZD/USD spot indicates the investors are not buying the weak tone in the NZD, although things might following a potential head and shoulders breakdown on the NZD/USD chart. 
• As of now, caution is warranted on the part of the NZD bears.