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FxWirePro: Relative options trades in Antipodean

The Aussie has been one of the vulnerable and worst pairs in the broad-based US dollar rally since the June FOMC and ECB meetings. The pair is now below weekly fair value estimate. Amid the lingering trade tensions between US-China that remain the market focus in the days to come, risks are to 0.72/0.73. But Australia’s key commodity prices have been broadly resilient; especially LNG and thermal coal, suggesting AUD downside should be contained multi-month. The RBA should also be optimistic about Australia’s growth outlook in its Aug statement. 

The US dollar should strengthen further if the Fed hikes further this year, and that will push NZD/USD lower. In addition, the NZ-US interest rate advantage has been eroded, removing one of the previous attractions of the NZD. Further, domestic data is indicating the NZ economy is slowing. 

Increase short Antipodeans through EURNZD, while holding short NZDUSD (covered put) and AUDJPY (put vs call spread). At this month’s RBNZ OCR announcement, the central bank kept the policy rate on hold at 1.75%. The RBNZ retained full flexibility on the next move, noting that “…we are well positioned to manage change in either direction –up or down –as necessary.” As we expected, there was a slightly dovish tinge to the Statement, with the outlook on GDP growth downgraded, and the assessment of spare capacity revised higher.

Moreover, the outlook for fiscal stimulus was downgraded and is now expected later. The global outlook was still described as supportive, although the RBNZ noted that the outlook for global growth had been tempered by trade tensions.

Importantly for NZD, the market is now starting to flirt with pricing in cuts -November-18 RBNZ meeting date OIS tenors were offered to sub the OCR in the wake of the RBNZ announcement -which starts to distinguish NZD from all other G10 markets. This warrants raising the size of the NZD short and we do so through EURNZD in view of the stabilization in the economic and political climate in Europe.

We also keep a short position in AUDJPY through a put vs call spread switch. This is the one defensive trade that hasn’t performed over the past week, although with Trump now potentially flagging a desire to withdraw from WTO, we remain comfortable with this as a hedge to a likely escalation in global trade tensions.

On JPY specifically, there is an impression in some quarters that the currency has lagged the move in risk markets, or at least the sell-off in EM, the suggestion being that the yen is now being held back by the depreciation in other Asian currencies.  So far, however, the empirical evidence doesn’t necessarily support this idea. In particular, if we model changes in USDJPY as a simple function of changes in the USD index and the S&P500, the yen is actually a few percent stronger than we might expect. This is consistent with our assessment that the yen is quite competitive versus other Asian FX and that Japan can afford a modest loss of regional competitiveness before this would become a problem for JPY.

Buy EURNZD at 1.7248, stop at 1.6720.

Long a 3m AUDJPY put, strike 77.50, short a 3m AUDJPY 81.25-83.50 call spread.

Short NZDUSD through a covered put. Short cash from 0.6893, short a 2m 0.6677 NZDUSD put for 39.6bp.Current profit +1.46%. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly AUD is inching at 4 (which is absolutely neutral), NZD spot index is flashing at -104 levels (which is bullish) while articulating (at 13:09 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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