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The major focus for the week is RBNZ as they are scheduled for their monetary policy, now expected to leave the OCR on hold in this upcoming June meeting review.
RBNZ cut the OCR by 25bp in May, and then remain on hold until 2020 when a weaker NZ economy will require a further cut. That should keep 2yr swap yields depressed, with fresh record lows below 1.60% likely.
The balance of risks has evolved in the direction of another cut (mainly due to global developments), but not so emphatically that the RBNZ needs to cut the OCR again so soon.
As discussed in this week’s essay, we now think the odds favor the RBNZ cut the OCR to a new low of 1.25% in August.
New Zealand’s economic growth has slowed in the last year, which we put down largely to domestic factors. While we expect growth to turn more positive over the coming year, the near-term picture remains subdued and the risks to the global economy have deepened. The outlook for monetary policy is highly uncertain, but we think that the odds now favor an OCR cut in August.
While the global risk appetite has improved as China has taken steps to underpin growth and fears over the US economy have waned. Commodity prices are mixed (iron ore up, thermal coal down) but overall point to higher AUD. But yield differentials should eventually weigh on AUD as the RBA in May paves the way for Aug rate cut and US markets remove Fed rate cut risk in 2019.
Buy NZDUSD put funded by selling an AUDNZD put In New Zealand, data from a limited calendar this week did little to improve sentiment around NZD, as Q1 business confidence in particular plunged. With concerns about domestic growth and rates markets poised for a central bank that has positioned for the first or two imminent cuts, but with certain positioning indicators indicating closer to neutral (refer above chart), we continue to believe there is downside scope for NZD as well.
AUDNZD, which we sold to finance the kiwi put, performed favorably on stronger Australian data. Note that, just as with the USDJPY put in the earlier trade, we re-strike the AUDNZD put in this structure to take in more premium.
Trade tips: Uphold a 3m NZD put/USD call, strike 0.6650 and short a 3m AUDNZD call, strike 1.0350. The total net premium received of 38bp. Marked at 0.30%.
Currency Strength Index: FxWirePro's hourly AUD spot index is flashing 96 (which is bullish), while hourly NZD spot index was at shy above -21 (mildly bearish) at 12:30GMT.
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
