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The RBA may have eased proactively in June which may buy the Bank some time before easing again, but this will not necessarily preclude AUD from fading further in coming weeks.
In particular, the ongoing deterioration in the global growth backdrop and negative trade outcomes are naturally bearish for the currency.
Furthermore, rate cuts to date have brought the currency closer into low- yielding status (policy rate now just 1%) which will continue to put capital outflow pressure on the economy, even if the current account deficit has improved in recent years (still -1.6%). The currency may receive some support from ongoing-elevated iron ore prices as well as some impetus from the fiscal side, but ultimately we don't view this as sufficient for overcoming negative global drags. And while the RBA may be paused, RBA commentary and data will continue to inform the outlook which over time should serve to narrow the 20bp gap between current OIS pricing and our forecasted terminal rate (0.50%). Upcoming data like unemployment next week should continue to help calibrate those expectations. We stay short against low-yielding CHF, which will benefit from its surplus status as well as the renewed lower-yield environment post-Powell.
Meanwhile, G10 commodity currencies have generally outperformed since the inception of our NZDJPY bear put spread in May, and NZD is no exception. Still, NZD should be liable for protracted downside given a similar scenario of falling yields with a relatively-worse balance of payments position compared to AUD.
On top of that, the RBNZ has proven quite sensitive to global developments; this week’s testimony from Powell focusing exclusively on global uncertainty is likely to galvanize a response from the Bank. Indeed, their next meeting in August is live and is well-priced, but there remains potential to reload their easing bias to help draw down rates and FX further. 2Q inflation next week may present some event risk (consensus is for a rebound to 0.6% q/q, JPM 0.5% from 0.1% in Q1) but this ought not to deter the medium-term RBNZ path at this juncture.
The risk to these trades comes from an ongoing strengthening in high beta FX given a more dovish ECB and Fed stance. As discussed earlier, we partially hedge this exposure via short EURNOK.
Trade Tips:
Hold AUDCHF in cash, marked at -0.50%.
Hold a 6m NZDJPY put spread. Paid 1.07% on 31stMay. Marked at 0.51%.
Short 2w (1%) AUDUSD OTM put option with positive theta (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, add long in 2 lots of delta long in 3m (1%) ITM -0.79 delta put options. Courtesy: JPM
