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The NZD drifted lower overnight and is sitting near support levels against both the USD and AUD.
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 widely expected, there would be 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.
Until the RBNZ later this week, the market will continue to take its cues from offshore, which means a further bias to flatten.
Increase short Antipodeans through EURNZD, while holding short NZDUSD (covered put) and AUDJPY (put vs call spread).
Importantly for NZD, the market is now starting to flirt with pricing in cuts -November-18 RBNZ meeting date OIS tenors were offered 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 pct 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 NZD is inching at -83 (which is bearish), USD spot index is flashing at -40 levels (which is bearish), while articulating (at 07:18 GMT). For more details on the index, please refer below weblink:
